As CMM’s legal blog has previously explored, last fall the U.S. Department of Labor proposed an independent contractor rule under the Fair Labor Standards Act (“FLSA”), which would undo the current rule put in place by the Trump administration in 2021 (the “Proposed Rule”). After conducting a notice and comment period, the Department of Labor is currently finalizing the Proposed Rule. What does this mean for your business? Read on for what employers need to know about the new rule.
1. What is the current test to determine what constitutes an independent contractor under the FLSA?
The distinction between independent contractors and employees is important because under the FLSA, employees are entitled to minimum wage, overtime pay, and other benefits, while independent contractors are not.[1]
Under the current rule, there is a five-factor test for determining whether an individual is an independent contractor or employee. The test evaluates:
- the nature and degree of control over the work;
- the worker’s opportunity for profit or risk of loss;
- the amount of skill required for the work;
- the degree of permanence of the working relationship; and
- whether the work is an integral part of the purported employer’s business.
This test considers the first two factors to be the most important, while the remaining three factors are considered less important. In other words, if an individual exercises substantial control over the work, or has a substantial opportunity for profit, or risk of loss, the individual will likely be classified as an independent contractor, without considering the other factors. This is significant because the current test makes it easier for employers to classify workers as independent contractors.
2. What is the test to determine what constitutes an independent contractor under the Department of Labor’s Proposed Rule?
According to the Proposed Rule, the test for determining whether an individual is an independent contractor or employee would consist of six factors. Unlike the current rule, rather than any factor(s) weighing more than the others, the Proposed Rule looks at the totality of the circumstances. This test evaluates:
- the nature and degree of the potential employer’s control;
- the permanency of the worker’s relationship with the potential employer;
- the amount of the worker’s investment in facilities, equipment, or helpers;
- the amount of skill, initiative, judgment, or foresight required for the worker’s services;
- the worker’s opportunities for profit or loss; and
- the extent of integration of the worker’s services into the potential employer’s business.
Most notably, the Proposed Rule adds an additional factor which considers the amount of the worker’s investment in facilities, equipment, or helpers, the lack of which makes it is more likely to be considered an employee. As a result, this new test would make it more difficult for workers to be classified as independent contractors. For example, even if an individual exercises substantial control over the work, or has a substantial opportunity for profit, or risk of loss, the individual may still be considered an employee, depending on the other four factors.
3. The Takeaway
Although the Proposed Rule may be subject to change prior to a final decision, business owners should remain aware of the new distinctions to avoid investigations by the Department of Labor should their independent contractors be reclassified as employees. Business owners should conduct an annual internal audit to make sure that all workers are properly classified. Please note that New York State law may have more stringent tests than the test proposed by U.S. Department of Labor.
Please contact our office to discuss your specific business situation.
Thank you to Michael Nadeau for his research and writing assistance.
[1] Allen Smith, DOL Will Issue New Independent-Contractor Proposed Rule, SHRM, June 6, 2022, https://www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/dol-will-issue-new-independent-contractor-proposed-rule.aspx.