The classification of employees vs. independent contractors is a hotly debated topic that we have seen impact many companies in the news, especially in a growing “gig economy”. The Department of Labor has prioritized clarifying this issue and on October 13, 2022, the Department of Labor’s (“DOL”) Wage and Hour Division published a proposed rule entitled “Employee or Independent Contractor Classification Under the Fair Labor Standards Act.” The rule offers updated guidance on determining whether an individual is an employee or an independent contractor. The publication would rescind a regulation published just last year on the same topic, which the DOL believes will reduce the risk that employees are misclassified as independent contractors – while also creating more understandable guidelines for employers who regularly use contractors.

This is the latest development in a rapidly evolving area of the law, and it carries implications for every employer that does business with independent contractors.

Why it Matters

In a press release accompanying the proposal, the DOL announced that the new rule would be more consistent with the Fair Labor Standards Act (“FLSA”) as interpreted by longstanding judicial precedent. Under federal law, including the FLSA, most non-exempt employees are entitled to certain benefits and protections, including receipt of a guaranteed minimum wage and eligibility to receive overtime pay. Independent contractors, on the other hand, are not entitled to such benefits and protections under the law. Nor do employers withhold FICA taxes or make other deductions from their pay as they would with employees.

Failure to properly classify a worker as an employee may expose an employer to liability under the FLSA’s minimum wage, overtime, and recordkeeping provisions, in addition to applicable state law. It could also result in costly penalties for unpaid wages, liquidated damages, state and federal taxes, and other damages. Note that many states also have laws that establish standards for classifying workers as employees, as opposed to independent contractors. Massachusetts, for example, has codified M.G.L. c. 149, Section 148B, the Independent Contractor law, which creates a presumption of employee status and sets forth a number of factors to determine worker status.

The new rule would apply to determinations of employee status under the FLSA. If adopted, the rule would generally make it more difficult for employers to classify workers as independent contractors. The DOL has demonstrated an interest in preventing misclassification, enforcing misclassification actions, and updating its guidelines to meet the evolving demands of a changing economy.

The Proposed Rule

The new independent contractor rule modifies DOL regulations and provides a road map to determine proper employment classification under the FLSA. If adopted, the DOL would use the rule when investigating or pursuing claims for FLSA violations. Courts could also look to the rule for guidance when evaluating those claims. According to the DOL, the rule aims to classify independent contractors as workers who, as a matter of “economic reality,” are not economically dependent on their employer for work, but are in business for themselves. It uses a “totality-of-the-circumstances” analysis in making this assessment. Under this test, the DOL will consider the following six factors in determining a worker’s classification, though the inquiry is highly fact-specific:

1. Nature and degree of control. The DOL may consider any factor that relates to an employer’s control over a worker, including scheduling, supervision over performance, setting prices, the ability to assign work, and the ability to work for others.
2. Skill and initiative. This includes whether a worker uses specialized skills to perform the work and acts in a way that is consistent with being in business for oneself. Under the rule, if a worker has no specialized skills, it may indicate employee status.
3. Degree of permanency of work relationship. The length of time and duration of a work relationship are relevant to a worker’s status under this rule. An open-ended arrangement may suggest employment, while a set end date may reflect independent contractor status.
4. Opportunity for profit or loss depending on managerial skill. If a worker demonstrates management skills that impact economic success or failure, they may be considered an independent contractor. On the other hand, a worker with no opportunity for profit (or loss) would likely be classified as an employee.
5. Capital investment. Capital investments may indicate independent contractor status.
6. “Integral factor.” If the work at issue is considered integral, meaning critical, necessary or central to the employer’s business, the worker may be considered an employee.

None of these factors alone are conclusive, and each one is examined on its own. Ultimately, dependence on a single employer or working arrangement is indicative of an employee-employer relationship.

The DOL is currently taking public comments on the proposal, and a 45-day comment period closes on November 28, 2022. If adopted, the new rule would rescind a 2021 Independent Contractor Rule that was criticized by some for departing from court interpretations of the FLSA and long-standing judicial precedent. The 2021 Rule uses a variation on the economic factors above.

As the DOL’s publication demonstrates, worker classification under federal law is a nuanced, fact-specific issue, and the FLSA remains in a state of change. Just this week, the Supreme Court heard argument on a case addressing the issue of whether an oil rig supervisor (earning over $200,000 per year, but paid on a daily basis) was exempt from the FLSA’s overtime requirements due to an exception for highly-compensated employees.

Given the complicated nature of these issues and penalties for misclassification, it is important to seek legal counsel when confronted with worker classification questions. Hinckley Allen’s Labor and Employment team have the experience and expertise to advise employers and help them comply with these laws and regulations.