On October 13th, 2022, the U.S. Department of Labor (DOL) published its proposed independent contractor rule for determining employee versus independent contractor classification. The proposed rule rescinds the previous 2021 rule on the topic. According to the DOL, the proposed independent contractor rule would be more consistent with judicial precedent and the Fair Labor Standards Act (FLSA). Worker misclassification has become problematic, particularly in the growing gig economy, where employers may often misclassify their employees as independent contractors. Earlier, the Federal Trade Commission (FTC) issued a statement on its policy protecting those gig workers.
Employee Misclassification Under the FLSA
As the nation’s primary wage law, and one of the most crucial employment laws all businesses need to know, the FLSA provides a minimum wage and overtime protection for virtually all U.S. workers. However, some employers illegally and inaccurately treat their workers as independent contractors to avoid paying required overtime. Besides gig workers, misclassification often affects employees working in construction, hospitality, home care, trucking, delivery, and personal services. What’s more, this illegal employee misclassification denies employees benefits and protections to which they are legally entitled. It’s worth noting that employee misclassification is illegal even if the employee agrees to the erroneous classification.
The Proposed Independent Contractor Rule
In brief, the proposed independent contractor rule focuses on an independent contractor’s economic independence from a client rather than the amount of income they earned or whether they have other income streams. To this end, the proposed independent contractor rule applies a six-factor economic reality test that examines the following areas:
- the extent to which the performed work is integral to the employer’s business;
- a worker’s level of investment in facilities and equipment;
- the nature and degree of control in the working relationship;
- a possible contractor’s opportunity for profit or loss;
- the amount of foresight and initiative judgment the worker needs to be successful; and
- how permanent or temporary the work relationship is.
Furthermore, the proposed independent contractor rule’s economic reality test looks at the totality of the circumstances surrounding a particular worker when determining whether they are really an independent contractor. Employers would need to analyze all six factors without giving predetermined weight to any particular factor or set of factors. Interested parties may submit comments on the proposed independent contractor rule. The 45-day comment period closes at 11:59 p.m. ET on November 28th, 2022.
Worker Misclassification Prevention eLearning Module
According to the DOL, as many as 30% of all independent contractors are misclassified. Employers that make this error violate the FLSA and are subject to lawsuits, tax penalties, and other monetary penalties. To help businesses demonstrate good-faith compliance with the FLSA and to avoid employee misclassification, Personnel Concepts created the Worker Misclassification Prevention eLearning Module. This training module helps employers understand proper worker classification under federal employment laws and includes digital resources like our independent contractor classification checklist to use when verifying the status of workers.