The U.S. Department of Labor on Tuesday unveiled a six-step “economic realities” test that looks to narrow the ability of employers to classify workers as independent contractors. The changes have broad implications as to whether, under federal law; workers are entitled to minimum wage and overtime pay; employers must comply with recordkeeping requirements for such employees; and payroll taxes such as FICA, workers’ compensation, and unemployment must be paid with respect to these workers. The misclassification of workers as independent contractors also can have dire consequences for employers based on the potential assessment of liquidated (double) damages and attorney’s fees under the Fair Labor Standards Act, particularly where such claims are brought as collective actions. The Department suggests that 10-30% of employers in the private sector are, per the proposed rule, misclassifying employees as contractors.

The proposed rule seeks to rescind a Trump-era rule which provided a different, classification framework (with a focus on control and opportunity for profit and loss). Many believe that the current rule provides a means to better predict and thereby classify a worker as a contractor or an employee. The current administration strove to withdraw the rule soon after it assumed office, but according to a federal court, the process it used to do so was flawed. Rather than fighting the ruling in the court of appeals, the current administration has opted to instead promulgate a new rule and thereby replace the current rule.

In essence, the DOL’s proposed rule eliminates the emphasis on two rather straight-forward core factors and instead purports to go back to a “totality of circumstances” approach that would consider all of the factors involved in the working relationship equally. When determining a worker’s status, the Biden DOL would use a multi-factor economic realities test that considers various factors of the working relationship to determine whether the worker is truly operating an independent business.

The proposed rule summarizes the economic realities test used to determine whether a worker is economically dependent on the employer for work or is in business for themselves. The proposed rule also states that no one factor or subset is necessarily dispositive and the list is not exhaustive. The six factors used to determine the economic realities of the work relationship under the proposed rule are:

  1. Opportunity for profit or loss depending on managerial skill (which considers whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing work, such as negotiating the charge or pay for the work provided);
  2. Investments by the worker and the employer (which considers whether any investments by a worker are capital or entrepreneurial in nature);
  3. Degree of permanence of the work relationship (a relationship that of an indefinite duration supports employee status);
  4. Nature and degree of control, including “reserved control,” over the performance of the work and economic aspects of the working relationship, including ability to set schedules, supervise performance, and limit ability to work for others;
  5. Extent to which the work performed is an integral part of the employer’s business (not whether any individual worker is particularly integral, but rather whether a function they perform is integral); and
  6. Skill and initiative, including whether worker uses specialized skills to perform the work and whether those skills contribute to business like initiative, as opposed to being dependent on training provided by employer.

The “devil is in the details.” Many critics believe that the Department’s claim that it is merely articulating the law as construed by the courts over the past few decades is an overstatement, and that instead the Department has selectively relied on decisions that would make it more difficult to establish a worker’s independent contractor status. The proposed rule, in many respects, resurrects the DOL’s position under the Obama Administration, guidance that was swiftly withdrawn by the Trump Administration as being too hostile to the standards recognizing independent contractor status, and guidance that the Administrator at that time said was specifically designed to support findings that contractors were more often than not misclassified employees. The proposed rule is not as weighted towards finding employee status as the standard articulated by the Department during the Obama Administration, but it is much more slanted towards making independent contractor status more difficult to establish than extant under the current/Trump Administration rule.

The public will have until November 27, 2022, to submit comments regarding the proposed rule. If the rule is ultimately implemented as proposed, it is anticipated that litigation will ensue challenging the regulatory change. If the rule survives threatened challenges, then the paradigm businesses have operated under by using independent contractors will dramatically change. Many business fear that it will not only serve to unduly increase costs, but it will also interfere with worker preferences, many of whom wish to have the independence associated with being an independent contractor. Under the proposed rule, many contractors likely will have to be reclassified, and businesses will have less comfort in classifying many workers as contractors and not employees. Under the proposed rule, many businesses will have to rethink if they wish to engage any worker as a contractor, but for those who are extremely tangential to the services or products offered.

If you have any questions regarding the DOL’s proposed rule, wish to provide comments to the DOL, or would like to discuss policies, processes, training and/or audits related to these issues—both for your remote and on-site workforce—please contact Abad Lopez, Rob Boonin, or your Dykema relationship attorney.