News + Insights

The below notice from the U.S. Department of Labor’s Wage and Hour Division (“DOL”) is announcing a newly proposed rule to return to the methods of the Obama Administration when determining whether an employer has established a lawful independent contractor relationship with an individual.

DOL’s approach to determining independent contractor status has been a bit of a swinging pendulum, depending on the party in charge of the Executive Branch.  The Trump Administration attempted to simplify the rules, by imposing a “Control and Direction Test,” focusing primarily upon the extent to which an employer controls the work of the independent contractor.  The Trump-era rules have been the subject of litigation and DOL efforts to set them aside in the Biden Administration.  With this Notice of Proposed Rulemaking, the Biden Administration has taken the formal steps necessary to return to the Obama-era “Economic Realities Test,” which looks subjectively at the independent contractor’s economic situation to determine whether the individual is truly independent, obtaining work from multiple sources, or instead reliant upon the work from one primary company.

Multiple state and federal agencies enforcing employer wage, hour, tax, and unemployment obligations have historically followed some kind of multifactor test when determining whether a valid independent contractor relationship exists.  Although the majority of states seem to follow something like the Economic Realities Test, a handful of states emphasize the “Control and Direction Test,” while yet a third group of states follow the “ABC Test,” which first became popular in California, and examines whether (A) the independent contractor is free from any direction or control by the company; (B) the work performed by the independent contractor is outside the course of the company’s business; and (C) the independent contractor is in an industry or trade customarily engaged on an independent basis.  There was widespread speculation among trade groups that the Biden Administration’s DOL might pivot to the ABC Test, which is generally considered to be the harder of the three prevailing tests for a company to satisfy when using individuals as independent contractors.

Because the direction and control of the work is a major consideration in all three prevailing independent contractor tests, as a practical matter, this announcement by the DOL brings the federal government’s rules applicable to independent contractors more in-line with the states and the courts, and should not have a significant effect on any employer strategies or on-going engagement of independent contractors.

We still routinely encourage our clients to conduct an annual review of their use of individuals who are independent contractors, a relationship that continues to be a focus of state and federal regulators, in addition to the plaintiffs’ bar.

Proposed Rule: Employee or Independent Contractor Classification

Today, the U.S. Department of Labor announced the publication of a notice of proposed rulemaking (NPRM), Employee or Independent Contractor Classification Under the Fair Labor Standards Act in the Federal Register.

Publication of the NPRM in the Federal Register starts the comment period that remains open for 45 days and closes on November 28, 2022. All comments submitted (including duplicate comments) become a matter of public record and will be posted without change to www.regulations.gov, including any personal information provided.

This NPRM, Employee or Independent Contractor Classification Under the Fair Labor Standards Act, would:

• Align the Department’s approach with courts’ interpretation of the FLSA and application of the economic reality test;
• Restore the longstanding 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 any predetermined weight to any particular factor or set of facts;
• Return to the longstanding interpretation of the factors, including the investment factor, control factor, profit or loss factor, and the integral factor, which considers whether the work is integral to the employer’s business; and
• Rescind the 2021 Independent Contractor Rule.