DOL Proposed Rule on the Test for FLSA Independent Contractor Status – What You Should Know 

Industry Information | February 18, 2023

In the famous words of Yogi Berra in the 1960s, “It’s like déjà vu all over again.” The definition of contractor provided by the Department of Labor (DOL) has been back and forth and back again, then forth and back so many times, trying to follow the guidance is becoming very challenging. The goal is to create guidance that will help organizations determine if an individual is considered an employee or an independent contractor. This blog will aim at distilling the most important details from these changes.

A Proposal From The Department of Labor

On October 11, 2022, the Department of Labor (DOL) issued a new proposed rule revising its guidance on classifying workers as independent contractors under the Fair Labor Standards Act (“FLSA”). The comment period for the changes was open until the end of November 2022 and we will receive confirmation of issuance shortly, with an effective date in late 2023 or even 2024.

This proposed rule seeks to rescind guidance issued by the DOL during the Trump administration which made it easier to classify workers as independent contractors by eliminating the key step of applying the “economic reality test.” This test strives to determine if the individual has ultimate responsibility for their profit or loss, by relying on an alleged employer or if they are truly in business for themselves. The former scenario would consider them an employee and the latter, independent contractor.

Under the Proposed Rule, the DOL would return to the Obama Administration-driven approach which would consider six main factors in determining worker classification: 

1. the nature and degree of the worker’s control over the work.
2. the worker’s opportunity for profit or loss based on personal initiative or investment
3. investment by the worker and the employer.
4. the degree of permanence of the working relationship.
5. the extent to which the work performed is an integral part of the employer’s business; and
6. the degree of skill and initiative exhibited by the worker.

One important topic the economic reality test does not address is the very common decision by an individual who considers themselves an independent contractor but chooses to be dependent on only one employer for their income. The lack of guidance in this area means the desire to guide organizations is likely to fall short and may raise more questions or incorrect interpretations.

Why does this even matter?

If the criteria for the classification are too strict, it may dissuade organizations from employing, (pun intended!), a contractor workforce, which is often a strategic business decision with many advantages. Incorrect classifications also result in claims against organizations related to overtime, minimum wage, and other wage and hour claims under respective state laws when an individual should be treated as an employee but was considered a contractor. The reputational exposure some of these cases are having is also causing increasing angst for organizations as the competition for resources and a strong delivery model increase in the current competitive economy.

An interesting note is that this federal guidance would not affect states like California, New Jersey, or Massachusetts, where state law uses the “ABC” test for classifying contractors.

Check Back With PlusOne For Future Updates

Organizations that engage contractors are encouraged to continue to monitor discussions for changes…and we know there are always more changes coming on this topic.

Contents are provided for information purposes only and should not be construed as legal advice. Users are reminded to seek legal counsel with respect to their obligations and use of PlusOne Solutions services.

About PlusOne Solutions

PlusOne Solutions has been an industry leader in the risk management field by specializing in compliance programs that meet the complex challenges of geographically dispersed contractors, vendors, and employee networks. PlusOne Solutions protects companies from possible financial, legal, and reputational risks associated with contractor and vendor relationships while creating safer work environments. To learn more, visit https://www.PlusOneSolutions.net.