Employment Law Alert!
US DEPARTMENT OF LABOR ANNOUNCES PROPOSED RULE ON CLASSIFYING EMPLOYEES, INDEPENDENT CONTRACTORS.
The U.S. Department of Labor has published a Notice of Proposed Rulemaking on Oct. 13 to help employers and workers determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act.
The new proposed rule can be found here: Notice of Proposed Rulemaking
According to the DOL, the proposed rule provides guidance on classifying workers and seeks to combat employee misclassification. “While independent contractors have an important role in our economy, we have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation’s most vulnerable workers,” said Secretary of Labor Marty Walsh. “Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages. The Department of Labor remains committed to addressing the issue of misclassification.”
The Proposed Rule DOL Rule
The DOL notice sets out what, in the DOL’s words, the proposed rule will accomplish including:
- Align the department’s approach with courts’ FLSA interpretation and the economic reality test.
- Restore the multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the FLSA.
- Ensure that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.
- Revert to the longstanding interpretation of the economic reality factors. These factors include the investment, control and opportunity for profit or loss factors. The integral factor, which considers whether the work is integral to the employer’s business, is also included.
- Assist with the proper classification of employees and independent contractors under the FLSA.
- Rescind the 2021 Independent Contractor Rule.
Classifying Workers Under the Proposed DOL Rule
Worker classification under the FLSA is significant because independent contractors are not subject to the minimum wage and overtime requirements of the FLSA. The National Employment Law Project, a pro-worker think tank, has estimated that as many as 30% of workers may be wrongly categorized as independent, lowering their pay and costing states billions of dollars in tax revenue. While independent contractors are a key component of the economy, courts and the DOL have often been inconsistent in determining how to classify workers.
The 2021 rule’s “economic reality” test focuses on whether workers are economically dependent on an employer or are in business for themselves. That rule pointed to a list of non-exhaustive factors to be considered but had sought to streamline the analysis by focusing on two “core factors”: (1) “the nature and degree” of control over the work; and (2) “the worker’s opportunity for profit or loss.
The Proposed Rule and Factors to Classify Workers
The new proposed rule highlights six factors to guide the analysis of whether the “economic realities of the working relationship” reveal a worker to be economically dependent on the employer for work or in business for him or herself based on a “totality-of-the-circumstances”: (1) the “opportunity for profit or loss depending on managerial skill”; (2) “investments by the worker and the employer”; (3) “degree of permanence of the work relationship”; (4) “nature and degree of control,” including “whether the employer uses technological means of supervision (such as by means of a device or electronically), reserves the right to supervise or discipline workers, or places demands on workers’ time that do not allow them to work for others or work when they choose”; (5) the “extent to which the work performed is an integral part of the employer’s business”; and (6) the “skill and initiative” of workers, referring to whether a worker uses specialized skills brought to the job or is “dependent on training from the employer to perform the work.” However, the proposed rule also states that “additional factors may be relevant” in the analysis.
Gig Workers Under the Proposed DOL Rule
Millions of Americans are working “gig” jobs and this labor has become vital to some transportation, restaurant, construction, health care and other industries. More than one-third of U.S. workers, or nearly 60 million people, did some freelance work in the past 12 months, a December 2021 survey by freelancing marketplace Upwork showed. Gig companies like Uber and Lyft have previously spoken out about the proposed change and warned that having to treat their drivers like employees could force them to modify their business practices. Though when the proposed rule was announced, Lyft said it would have “no immediate or direct impact” on its business at this time and Uber asked the administration to listen to workers. Despite this, the reaction in markets for major gig companies was immediate. Shares of Lyft and Uber tumbled about 13% in early trading.
Associations Speak Out Against Proposed DOL Rule on Classifying Workers
The response from business associations was equally swift. The U.S. Chamber of Commerce, released a statement saying “the proposed rule has a number of concerning provisions that could have significant negative impacts on workers and small businesses.” Brian Turmail, vice president of public affairs and strategic initiatives for Associated General Contractors of America, went even further, stating “We worry that this rule will go well beyond its ostensible mission of protecting workers and instead stifle the many entrepreneurial opportunities that have long existed in the construction industry.” And the National Retail Federation on Tuesday said it “staunchly opposes a change” and called the rule unnecessary.
Despite this, the acting head of the Labor Department’s Wage and Hour Division told reporters that the rule is unlikely to result in large worker classification changes. “What we anticipate is that this will really help provide guidance to both avoid and prevent misclassification,” Jessica Looman said during a press call, according to Bloomberg News. “But this is a framework that has been used and has been well recognized and understood.”
Proposed Rule Comment Period
The DOL’s Wage and Hour Division is soliciting comments on the proposed rule. Comments, which must be submitted from Oct. 13 to Nov. 28, 2022, and should be submitted online or in writing to the Division of Regulations, Legislation and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Ave. NW, Washington, DC 20210.
If you have any questions about how the proposed rule may impact your business or employee/contractor classification, or would like to schedule an initial consultation, please contact Navigant Law Group, LLC at (847) 253-8800 or email us at hello@navigantlaw.com.
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