Independent Contractor Misclassification and Compliance News October 2022

By MBO Partners | October 28, 2022

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misclassification and compliance news

The Department of Labor proposed a new rule for classifying workers

The proposed rule changes the way certain factors are considered in the economic reality test

Courts will continue to weigh the facts in each individual case to determine if a worker is an employee or independent contractor.

As the independent workforce continues to grow, so do the issues of worker compliance and misclassification. It is important for enterprises to remain informed about the latest laws, regulations, and developments surrounding these topics. Each month, we’ll bring you the latest news stories from around the web.

U.S. Department of Labor Proposes New Rule for Classifying Workers as Employees or Independent Contractors 

The United States Department of Labor (DOL) proposed rule to revise the DOL’s analysis for determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA or Act). The proposed rule says that the proposed changes would make the DOL’s approach more consistent with judicial precedent.

What Does the New Worker Classification Rule Change?

The proposed rule changes the way certain factors are considered in the economic reality test – the test to determine if a worker is an employee or independent contractor under the FLSA. The economic reality test looks at whether a worker is economically dependent on the employer for work (and is an employee) or is in business for themselves (and is an independent contractor). The proposed rule adopts a totality-of-the-circumstances approach that includes six (6) factors whereas the current rule has two core factors and three other factors that may be considered. The proposed rule puts forward these factors to be considered:

  1. Opportunity for profit or loss depending on managerial skill. [part of core factor (ii) of the current rule]
  2. Investments by the worker and the employer. [part of core factor (ii) of the current rule]
  3. Degree of permanence of the work relationship. [additional factor (ii) of the current rule]
  4. Nature and degree of control. [core factor (i) of the current rule]
  5. Extent to which the work performed is an integral part of the employer’s business. [additional factor (iii) of the current rule]
  6. Skill and initiative. [additional factor (i) of the current rule]
  7. Additional factors. Additional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA.

The proposed rule removes the emphasis on two core factors (with three additional factors that can be considered) in the current rule. Both the proposed rule and the current rule adopt the economic realities test that was introduced in a number of Supreme Court cases in the 1940s. Circuit courts have adopted slightly different versions of the economic realities test – with slightly different emphases. Both the current rule and the proposed rule were adopted to try to standardize the economic realities tests.

The Biden administration is known for supporting organized labor and many commentators view this rule as a benefit to organized labor. As a candidate, Joe Biden promised to establish a standard for all employment laws modeled on the stricter ABC test that is in place in California and Massachusetts. To the extent the proposed rule does not adopt the ABC test, the rule is a victory for those who want to operate an independent business and the clients that engage them.

What is the Current Worker Classification Rule?

The current rule was issued in January 2021 with an effective date of March 8, 2021. Before it became effective, the DOL delayed the rule and then withdrew it in May 2021. The withdrawal of the rule was challenged and in March 2022, a federal district court vacated the DOL’s delay and withdrawal of the rule so the current rule was effective as of March 2021.

The current rule adopted a version of the economic realities test that focused on two core factors and has three additional factors. The core factors are:

(i) The nature and degree of the individual’s control over the work. This factor weighs towards the individual being an independent contractor to the extent the individual, as opposed to the potential employer, exercises substantial control over key aspects of the performance of the work, such as by setting his or her own schedule, by selecting his or her projects, and/or through the ability to work for others, which might include the potential employer’s competitors…. [factor (4) of the proposed rule] and

(ii) The individual’s opportunity for profit or loss. This factor weighs towards the individual being an independent contractor to the extent the individual has an opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen or judgment) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work…” [combination of factors (1) and (2) of the proposed rule] [emphasis added]”

The additional factors that may be considered if the core factors are not determinative.

(i) The amount of skill required for the work. This factor weighs in favor of the individual being an independent contractor to the extent the work at issue requires specialized training or skill that the potential employer does not provide. This factor weighs in favor of the individual being an employee to the extent the work at issue requires no specialized training or skill and/or the individual is dependent upon the potential employer to equip him or her with any skills or training necessary to perform the job. [factor (6) in the proposed rule]

(ii) The degree of permanence of the working relationship between the individual and the potential employer. This factor weighs in favor of the individual being an independent contractor to the extent the work relationship is by design definite in duration or sporadic, which may include regularly occurring fixed periods of work, although the seasonal nature of work by itself would not necessarily indicate independent contractor classification…[factor (3) in the proposed rule]

(iii) Whether the work is part of an integrated unit of production. This factor weighs in favor of the individual being an employee to the extent his or her work is a component of the potential employer’s integrated production process for a good or service. [factor 5 in the proposed rule]

The proposed rule does not have “core” and “additional” factors, but all factors can be considered in an analysis of the totality of the circumstances to determine if a worker is an employee or independent contractor. The proposed rule is more complex in that it allows more factors to be considered in the totality of the circumstances analysis.

Uber and Lyft Response

Some commentators suggest that the proposed rule was aimed at Uber and Lyft drivers (see Biden declares war on Lyft and Uber and Biden Officials Propose Reclassifying Uber, Lyft Gig Workers as Employees). The response from Uber and Lyft themselves was much more measured. Uber’s response was that the “proposed rule takes a measured approach, essentially returning us to the Obama era, during which our industry grew exponentially.” Similarly, Lyft said that the proposed rule is “similar to the approach the Obama Administration used to determine employee status. This approach previously applied to Lyft and app-based companies and did not result in reclassification of drivers.” While some commentators are predicting doom and gloom, Uber and Lyft have adopted a more measured response.

If it is Adopted, What Affect Would the Proposed Rule Have?

Richard Reibstein writes “The Labor Department’s Independent Contractor Rule Has Little if No Legal Impact but Is Likely To Cause Anxiety for Stakeholders” which is a fair summation of the likely effect of the proposed rule. It is “unlike most regulations with hard and fast rules” and “is in the nature of an administrative interpretation comprising the Labor Department’s review of existing court decisions and its articulation of a preferred legal analysis.” (see No Major Changes; Impact of Final Independent Contractor Regulation Issued Today Is Questionable, discussing the implementation of the current rule).

Both the proposed rule and the current rule relying on weighing of a number of factors to determine if the workers “as a matter of economic reality, are dependent upon the business to which they render service.’’ Bartels v. Birmingham, 332 U.S. 126, 130 (1947). Both the current and proposed regulations refer to the factors as “guides”. The current regulation says “[t]he economic reality factors … of this section guide the determination of whether the relationship between an individual and a potential employer is one of economic dependence and therefore whether an individual is properly classified as an employee or independent contractor. These factors are not exhaustive, and no single factor is dispositive.” (emphasis added).

The proposed rule says “These factors are tools or guides to conduct a totality-of-the-circumstances analysis. This means that the outcome of the analysis does not depend on isolated factors but rather upon the circumstances of the whole activity to answer the question of whether the worker is economically dependent on the employer for work or is in business for themself.” (emphasis added).

While the current rule has two core factors and three additional factors and the proposed rule has six factors plus additional factors, both rules contemplate a weighing of the factors and using the factors as a guide to the final determination. Courts will continue to weigh the facts in any particular case to determine if a worker is an employee or independent contractor. By relying on the totality of the circumstances analysis, the classification may be more complex and require additional expertise to properly classify workers.

MBO does not expect that any independent contractor working for MBO will need to be reclassified if this rule takes effect nor than any material change will necessary to its process.

For more information, check out our resources page on misclassification and compliance. If you have any questions about engagement, classification, or management of your independent workforce, we’re always here to help. 

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