DOL issues proposed rule regarding independent contractor classification

At a glance

• On 11 October the Department of Labor (DOL) released its long-awaited rule defining the standard governing whether workers should be classified as employees or independent contractors.
• The proposed rule returns to a multi-factor economic realities test widely viewed as making it easier to classify workers as employees.

On 11 October the Department of Labor (DOL) released its long-awaited rule defining the standard governing whether workers should be classified as employees or independent contractors. The proposed rule returns to a multi-factor economic realities test widely viewed as making it easier to classify workers as employees.

The proposed rule comes in the wake of a March 2022 ruling from a district judge in the Eastern District of Texas, which found that the DOL’s delay and withdrawal of a final rule issued during the Trump Administration and set to go into effect March 2021 was unlawful – effectively reinstating the final rule. Under the currently effective (but soon to be rescinded) final rule issued by the Trump Administration, the two factors of “the nature and degree of the individual’s control over the work” and “the individual’s opportunity for profit or loss” are “afforded greater weight” in determining the existence of an independent contractor relationship.

If these two factors are inconclusive, three other factors may be considered: “the skill or expertise required by the individual; the permanency of the relationship between the parties; and whether the work is “part of an integrated unit of production.”

Under the proposed rule, the DOL will return to a multi-factor economic realities test that considers each of the factors of the working relationship equally to determine whether the worker is economically dependent on the employer for work or truly in business for themselves. As the proposal notes, this “totality-of-the circumstances” analysis was utilized by the DOL and various federal courts for more than seven decades before the Trump Administration adopted a “weighted analysis” in its rulemaking.

The new rule proposes to consider the two “weighted” factors from the current rule (“the nature and degree of the individual’s control over the work” and “the individual’s opportunity for profit or loss”), along with four others: (1) investments by the worker and the employer, (2) the degree of permanence of the working relationship, (3) the extent to which the work performed is an integral part of the employer’s business and (4) the degree of skill and initiative exhibited by the worker. The DOL may also consider “additional factors” beyond those six if they indicate the worker may be in business for themselves, according to the proposal.

The proposed rule will be officially published in the Federal Register on 13 October. The public will have 45 days to comment on the proposed new rule before it becomes final. The rule will also likely be subject to legal challenges when it becomes final.

Employers are encouraged to prepare for the imminent implementation of this new standard and, if necessary, re-evaluate the terms and scope of their independent contractor relationships to ensure that workers are properly classified.