DOL Proposes Rule That Could Recategorize Many Employees into Independent Contractors

Michell Pacheco

Associate Editor

Loyola University Chicago School of Law, JD 2022

The U.S. Department of Labor (“DOL”) has recently proposed a rule change that would revise its interpretation of “independent contractor” under the Fair Labor Standards Act (“FLSA”). According to DOL, which has the power to investigate worker complaints about misclassifications, this change is needed to promote certainty for stakeholders, reduce litigation, and encourage innovation in the economy. However, this proposed rule could also diminish employees’ rights because independent contractors have fewer protections under FLSA. This rule widens the scope of who can be considered an independent contractor. Thus, many workers classified as employees could be reclassified as independent contractors and lose protections under FLSA.

Determining a worker’s status under the FLSA

Under FLSA, an employer must pay their employees at least the federal minimum wage for every hour worked and overtime pay for every hour worked over in a workweek. Also, FLSA mandates that employers keep certain work records about their employees. In contrast, independent contractors are not considered employees under FLSA. For this reason, employers are not required to pay independent contractors the federal minimum wage for every hour worked or overtime pay. Employers are also not required to keep work records about independent contractors.

FLSA does not define “independent contractors,” but it defines “employ” as including “to suffer or permit to work.” This term has been interpreted by the U.S. Supreme Court and DOL as requiring an evaluation of the extent of the worker’s economic dependence on the employer. The U.S. Supreme Court has referred to this as the “economic reality” test. According to DOL, the ultimate inquiry in deciding a worker’s status is whether, as a matter of economic reality, the worker is dependent on a particular business or organization for work.

If the person is dependent on a particular business, then she is an employee, and if the person is not dependent on a particular business, she is an independent contractor. U.S. appellate courts have developed similar non-exclusive multi-factor tests to determine the “economic reality” test. Further, DOL has also used a combination of the courts’ factors in determining whether an employee is economically dependent on the employer. However,  there is currently no definitive test that the courts or DOL have used to determine a worker’s status under FLSA.

Proposed rule change 

DOL’s proposed rule change would amend the FLSA by adding a provision explaining that an independent contractor is a worker who, as a matter of economic reality, is in business for herself as opposed to being economically dependent on the potential employer for work. Additionally, the proposed regulations explain that the inquiry into economic dependence should be conducted by applying several factors, with no one factor being dispositive. However, DOL is also proposing that two of these new factors – the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss – should be more probative in determining economic dependence or lack thereof. As a result, DOL believes that these factors should be afforded greater weight in the analysis than others.

Negative implications of the proposed rule change

The new rule might worsen the long-standing issue of worker misclassification, as companies routinely have sought to lower labor costs by hiring workers as independent contractors, who don’t have to be paid health insurance and other benefits afforded to employees. The pandemic has revealed the shortcoming of this strategy by employers, as Congress was compelled to pass an aid package to provide unemployment insurance for self-employed and gig workers, that unlike traditional unemployment, received no funding from the companies who rely on these workers.

Employee rights advocates believe that DOL’s proposed analysis should scrutinize the company and the work structure it establishes, rather than place most of the focus on the worker. Advocates believe that the main focus should be placed on companies since they are the ones that decide to act by hiring independent contractors. As such, DOL’s new rule overlooks the fact that if a worker accepts to work for a company, they are subject to the company’s control.

New rule brings more clarity into categorizing workers 

This new rule would streamline the multitude of factors used by different courts and DOL by providing a uniform analysis when deciding whether a worker is an employee or an independent contractor under FLSA. Another benefit is that it forces DOL to be more transparent with its reasoning when categorizing a worker since they must follow this new rule without adding new or different factors to their analysis. DOL would not be able to change this new analysis in the future without going through the public process required to change such rules.

Public will have a chance to comment on DOL’s new rule

This new rule could have tremendous implications on workers’ rights. It could create more uncertainty since millions of workers, currently considered employees, could be recategorized as independent contractors. It ultimately threatens to lower working conditions for more workers since independent contractors do not have as many protections as employees under FLSA. For example, employers are not required to provide health insurance or pay the federal minimum wage to independent contractors. The public has thirty days to post public comments about this proposed change. They should consider voicing their opinions and concerns about this new rule’s implications on workers’ rights.