Last week, the U.S. Department of Labor’s (DOL) Wage and Hour Division announced the publication of a highly anticipated notice of proposed rulemaking (NPRM) on worker classification under the Fair Labor Standards Act (FLSA). The proposed rule, the latest in a tumultuous line of regulations on the independent contractors topic, would establish a framework for applying a redrawn economic reality test to worker classification. In a statement accompanying the release, DOL said that the proposed rule seeks to combat misclassification of independent contractors, an issue that has gained national attention amid the rise of the gig economy.
The DOL has long used variations on an economic reality test to assess employment status under the FLSA. During the Obama administration, an administrative interpretation was issued by the DOL that was later withdrawn by the Trump administration. The latter subsequently issued its own proposal, finalizing a rule in January 2021. However, shortly after President Biden took office later that month, the administration moved to delay and ultimately rescinded by rule the Trump-era independent contractor rule. Further complicating matters, in March 2021 a federal judge reinstated the Trump-era rule after finding that the DOL violated the Administrative Procedure Act by failing to properly seek public comment or consider policy alternatives before delaying and revoking the rule.
The newly proposed rule addresses the judicial findings by formally rescinding the Trump-era rule and replacing it with the new rule, marking a return to some of the Obama-era considerations. The preamble provides the four regulatory alternatives that were examined before the agency settled on the proposed rule now proposed.
Overview of the Proposed Classification Framework
The proposed rule clarifies that a totality of the circumstances approach should be applied in examining the economic realities of a worker and employer relationship to determine whether—or not—an independent contractor classification is supported. It explains that the factors are not exhaustive, and no single factor is dispositive. Unlike the prior administration’s rule, no factors receive extra weight and more factors are to be considered. The proposed rule addresses each of the economic reality factors, including making revisions as follows:
- Investment. Restores investment to a standalone factor and accounts for whether a worker’s investment is capital or entrepreneurial in nature.
- Opportunity for profit and loss. Separated from investment, the opportunity factor focuses on whether a worker exercises managerial skill that affects their economic success or failure (commonly termed their profits or losses). This was a core factor under the prior administration’s rule.
- Permanence. Establishes that a lack of permanence should be considered and provides that in certain roles, such as temporary and seasonal work, it may favor worker status.
- Control. Provides for broader application of the control factor that encompasses issues like scheduling, supervision and exclusivity, among others. The extent to which a worker exercised control was a core factor under the prior administration’s rule.
- Integral. Revives a more expansive consideration of the integral factor by assessing whether the work being performed is “integral” to the business. However, unlike the ABC test from California and other states, even if the work is “integral” to the business, that factor is not dispositive.
Interested parties will have 45 days to submit comments on the rule after its publication in the Federal Register, which was scheduled for Oct. 13. Now that the comment window has closed, staff will begin working through the feedback as they prepare to release a final rule before the end of President Biden’s current term. In the interim, the prior administration’s rule remains in effect, and will only be rescinded if the NPRM becomes a final rule.
As expected, the rule does not propose the adoption of a strict “ABC”-style test, which allows for consideration of only three factors and generally favors worker status. This restrictive, bright-line approach is favored by many congressional Democrats and President Biden. DOL officials maintain that they do not have the authority to implement such a standard without congressional approval given the Supreme Court’s decisions concerning the appropriateness of an economic reality test in assessing a worker’s status under the FLSA. Like prior iterations, any final rule will likely be subject to legal challenge.
The Protecting the Right to Organize (PRO) Act, which would codify a California-style ABC classification test, passed the House earlier this session but remains stagnant in the Senate. It is uniformly opposed by congressional Republicans, meaning that while it may resurface in the 118th Congress, it remains unlikely to become law regardless of party control next session.