The U.S. Department of Labor (“U.S. DOL”) recently released proposed rules intended to clarify when workers are classified as employees as opposed to independent contractors under the Fair Labor Standards Act (“FLSA”). The proposed rules would abandon the current regulations which expanded the use of independent contractors and return to the position that the economic reality of the relationship between contractor and alleged employer should be evaluated considering the “totality of the circumstances” and not by weighting or tallying factors.

Specifically, in conducting this analysis, courts will consider the following six non-exhaustive factors:

1. Opportunity for profit or loss depending on managerial skill

The U.S. DOL provides that this factor considers whether the worker exercises his/her own managerial skill that affects his/her economic success or failure. For example, if the worker can (1) negotiate his/her pay; (2) accept or decline jobs; (3) choose the order and/or time in which the jobs are completed; and/or (4) make decisions to hire others and/or purchase materials and equipment, it is more likely that a court will consider a worker an independent contractor and not an employee.

2. Investments by the worker and the employer

The U.S. DOL notes that independent contractors make both capital investments to generally support their business and investments to perform particular jobs; therefore, the existence of expenses to perform jobs will not prevent this factor from indicating independent contractor status so long as there are also investments that are capital in nature indicating an independent business.

According to the proposed rules, costs like tools, equipment to perform specific jobs, and the workers’ labor are not, however, evidence of capital or entrepreneurial investments. Moreover, “[t]he use of a personal vehicle that the worker already owns to perform work— or that the worker leases as required by the employer to perform work—is generally not an investment that is capital or entrepreneurial in nature.”

In addition, the worker’s investments should be evaluated on a relative basis with the employer’s investments.  However, “a worker’s investment need not be (and rarely ever is) of the same magnitude and scope as the employer’s investment to indicate that the worker is an independent contractor.” Nevertheless, the worker’s investment should be of sufficient magnitude to support the conclusion that the factor supports independent contractor status.

3. Degree of permanence of the work relationship

This factor considers whether the work relationship between the employer and the worker is indefinite/continuous or definite/nonexclusive.  The proposed rules provide that the “permanence” factor commonly addresses whether the worker’s relationship with the employer is exclusive, as such a relationship suggests permanence. However, they acknowledge that simply because a worker holds more than one job at a time, or only works irregularly, does not necessarily imply that they are an independent contractor, particularly if these workers “are economically dependent on each employer for work—as compared to a worker who is in business for themself and chooses to market their independent services or labor to multiple entities[.]”

4. Nature and degree of control

The “control” analysis “focuses on whether the alleged employer still retains control over meaningful economic aspects of the work relationship such that the control indicates that the worker does not stand apart as their own business.”

The proposed rules provide that control can be exerted directly in the workplace by an employer, such as when it sets a worker’s schedule, compels attendance, or directs or supervises the work. However, the absence of these more apparent forms of control does not invariably lead to the conclusion that the factor weighs in favor of independent contractor status. Employers may also exercise control in other ways, such as by relying on technology to supervise a workforce, setting prices for services, or restricting a worker’s ability to work for others—actions that can exert control without the traditional use of direct supervision, assignment, or scheduling.

5. Extent to which the work performed is an integral part of the employer’s business

This factor addresses whether the work performed is an integral part of the employer’s business. If the worker is performing work that is critical, necessary, or central to the employer’s principal business, it is more likely that the worker is an employee, not an independent contractor.

6. Skill and initiative

The proposed rules provide an “amount of skill required for the work” factor and states that 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.”  That regulation further states that 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.”

What Employers Should Do Now

The U.S. DOL is now allowing the public to submit comments on the rule until December 13, 2022. After the comment period closes, the U.S. DOL will review the public comments and may modify the proposed rule or adopt the proposed rule as a final rule.  Employers should prepare to review their independent contractor classifications in light of the new proposed rules.

We will continue to monitor updates regarding the proposed independent contractor regulations and will keep you informed of further developments.