On Oct. 13, the U.S. Department of Labor (DOL) proposed a rule change in its process for classifying workers as employees versus independent contractors under the Fair Labor Standards Act (FLSA).

The proposed rule would use a six-factor “economic reality test” to to determine whether a worker is economically dependent on the employer or in business for themselves.

The litmus is based on the following factors:

  • If the work in question is an integral part of the employer’s business;
  • If the worker’s managerial skill affects the worker’s opportunity for profit or less;
  • If the relationship between the worker and employer is permanent or indefinite;
  • The nature and degree of the employer’s control;
  • If the worker uses specialized skills to perform the work, and if those skills contribute to business-like initiative; and
  • If investments by a worker are capital or entrepreneurial in nature.

The DOL said the proposed rule would “combat employee misclassification,” which occurs when an employer incorrectly defines a worker as an independent contractor rather than an employee.

“[Employee] misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages,” said Labor secretary Marty Walsh.

In announcing the proposed changes, the DOL states it is responsible for ensuring that employers do not misclassify FLSA-covered workers as independent contractors and deprive them of their legal wage and hour protections. Misclassification denies basic worker protections such as minimum wage and overtime pay and affects a wide range of workers in the home care, janitorial services, trucking, delivery, construction, personal services, and hospitality and restaurant industries, among others.

Before publication earlier this month of the proposed rulemaking, the department’s Wage and Hour Division considered feedback shared by stakeholders in forums during the summer of 2022 and is now soliciting comments on the proposed rule from interested parties through November 28, 2022.

Specifically, the DOL announced that the proposed changes would:

  • 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 National Association of Homebuilders (NAHB) supported the 2021 Independent Contractor Rule, which it says gives greater weight to two factors in determining whether a worker is an employee or independent contractor, even if other factors are relevant — the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss. Considering that it might be rescinded, the NAHB is analyzing the contents of the proposed rule and assessing its impact on residential construction, and has indicated via press release it will submit comments in response to DOL before the deadline.

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