Department of Labor Proposes Independent Contractor Interpretation
In the latest salvo in the battle over the classification of workers as independent contractors or employees, the U.S. Department of Labor announced the publication of a new proposed interpretation. The final document set forth in Notice of Proposed Rulemaking will not be an actual rule or regulation, because the DOL has no statutory authority to define the distinction between independent contractors and employees in a way that is binding on courts. Rather, the interpretation is published as a guide as to how the Department will enforce the Fair Labor Standards Act, and in the hope that courts will defer to the DOL’s views on the subject.
The latest proposal is an effort by the DOL to undo a 2021 interpretation issued in the last days of the Trump administration, which the DOL formally withdrew in May 2021. That interpretation listed five factors to be considered in determining independent contractor status: the nature and degree of control over the work; the individual’s opportunity for profit and loss; the amount of skill required for the work; the degree of permanence in the working relationship; and whether the work was part of an integrated unit of production. The first two factors were identified as “core factors.” If both “core factors” point to the same classification, there is a “substantial likelihood” that the classification is correct, according to the 2021 interpretation.
The new interpretation advanced by the DOL consists of a six factor “totality-of-the- circumstances” test which examines: the opportunity for profit and loss depending on the managerial skill of the worker; the investments by the worker and employer, with a focus on whether the worker’s investments support its independent business; the degree of permanence in the work relationship; the nature and degree of control by the entity using the worker’s services; the extent to which the work is an integral part of the employer’s business; and whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative No factor or set of factors has particular weight, and additional factors may be considered.
The new test proposed by the DOL is essentially the same as the test historically used by courts in independent contractor misclassification cases. The problem with that test is that it is merely a list of factors, without any real guidance to the correct conclusion. In recurring situations, court decisions provide some, but limited, guidance.
The classification of workers as independent contractors or employees has far-reaching implications. It affects many areas of law besides under the Fair Labor Standards Act, including payroll taxes, employee benefits, workers’ compensation, unemployment compensation, and anti-discrimination laws. Many federal and state agencies are already pursuing misclassification claims, particularly in the construction industry. Many high-profile misclassification disputes involve workers in the “gig” economy, such as ride service and delivery drivers and freelancers.
The proposed interpretation will be open for comment from October 13, 2022 to November 28, 2022, after which the DOL can issue a final interpretation, including any modifications to the proposal it chooses to make.