Worker Classification Rule

July 20, 2022

The Office of Information and Regulatory Affairs (OIRA) is in the process of reviewing a proposed rule from the U.S. Department of Labor’s (DOL) Wage and Hour Division to rewrite how workers should be classified as independent contractors. The draft proposed rule, “Employee or Independent Contractor Classification Under the Fair Labor Standards Act” is the second attempt by the Biden Administration at revamping how independent contractors are classified.

Under the Fair Labor Standards Act (FLSA), employees are entitled to minimum wage, overtime pay and other benefits. Independent contractors are not entitled to such benefits, but they generally have more flexibility to set their own schedules and work for multiple companies.

During President Donald Trump’s administration, the DOL issued a final rule clarifying when workers are independent contractors versus employees. The rule applied an economic-reality test that primarily considers whether the worker operates his or her own business or is economically dependent on the hiring entity.

The standard was slated to take effect in March 2021, but President Joe Biden’s administration issued rules delaying and ultimately withdrawing the standard.

Judge Marcia Crone of the U.S. District Court for the Eastern District of Texas reinstated the Trump administration’s rule in a March 14 order, finding that the Biden administration’s actions violated the Administrative Procedure Act (APA).  The court reinstated the DOL’s Trump-era independent contractor rule because the current DOL did not follow the proper procedures when it rescinded the rule in 2021.

The DOL has traditionally analyzed several factors to consider whether a worker is an independent contractor or employee and looked at “the totality of the circumstances.” The Trump-era rule would have applied a more-limited economic-reality test to determine whether workers are independent contractors or employees and would have primarily considered the following factors:

  • The nature and degree of control over the work.
  • The worker’s opportunity for profit or loss based on initiative and investment.

Three other factors would have served as guideposts in determining employment status:

  • The amount of skill required for the work.
  • The degree of permanence of the working relationship between the worker and the potential employer.
  • Whether the work is part of an integrated unit of production (or the individual works under circumstances analogous to a production line).

At this stage, it is unclear whether the DOL’s pending proposal will simply reattempt to scrap the Trump-era rule in an administratively proper way or seek to install a new test for independent contractor status.