DOL Seeks to Restore the Totality-of-the-Circumstances Approach to the Test for Independent Contractor Classification

The Department of Labor has issued a new proposed rule to provide guidance on the classification of independent contractors and employees under the Fair Labor Standards Act and as discussed by Foley’s Labor and Employment team in its employment log blog. The proposed rulemaking is intended to combat employee misclassification and may have a significant impact on the gig economy, franchisors, and distributors. The proposed rule is part of an ongoing effort to expand restrictions around entities benefitting from relationships with independent contractors.

 The proposed rule (“2022 Rule”) is set to replace the Department’s prior rule published at the tail end of Donald Trump’s presidential term (“2021 Rule”). The 2021 Rule departed from the Department’s longstanding totality-of-the-circumstances test. Notably, the 2021 Rule focused its analysis on two “core factors”—the nature and degree of control over the work and the worker’s opportunity for profit and loss. The 2021 Rule provided that if these core factors pointed towards the same classification (i.e., both favor independent contractor status or vice versa), there was a substantial likelihood that classification was accurate for determining the worker’s status. The 2021 Rule had three additional less probative, “non-core” factors: the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the employer, and whether the work is part of an integrated unit of production. These additional non-core factors generally only impacted the analysis when the “core factors” conflicted.

Now, however, the Department seeks to rescind the prior rule—determining that its retention would have a confusing and disruptive effect on workers and businesses due to the 2021 Rule’s supposed departure from longstanding case law. The proposed 2022 Rule revives the totality-of-the-circumstances analysis of the economic reality test, where the factors do not have a predetermined weight and no factor is dispositive.

The Department believes that restoring this version of the economic realities test re-aligns the Department with the existing judicial precedent and is more grounded in the ultimate inquiry of whether a worker is in business for themself or is economically dependent on the employer for work.

 Specifically, in the Department’s news release, it provided that the new proposed rule would do the following:

• 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. 

The Department published the proposed rule on the Federal Register on October 13, 2022. The initial deadline for interested parties to submit comments was November 28, 2022. On October 26, 2022, the Department extended the comment submission deadline by 15 days. The comment period closes at 11:59 p.m. ET on December 13, 2022.