Here we go again! It seems like lately, every time a new presidential administration is elected, we get new rules that overturn existing rules that often go back to other, even older rules. It’s like watching a tennis match: back and forth and back and forth. That is certainly true with the U.S. Department of Labor and its rules for classifying workers under the Fair Labor Standards Act.
According to today’s WHD news release, “The U.S. Department of Labor will publish a Notice of Proposed Rulemaking on Oct. 13 to help employers and workers determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act.”
Read the news release here.
The Notice of Proposed Rulemaking is 184 pages long and it rescinds the 2021 Independent Contractor Rule promulgated by the DOL under former President Donald Trump. According to the WHD:
“While independent contractors have an important role in our economy, we have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation’s most vulnerable workers,” said Secretary of Labor Marty Walsh. “Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages. The Department of Labor remains committed to addressing the issue of misclassification.”
Specifically, the proposed rule would do the following:
- Align the department’s approach with courts’ FLSA interpretation and the economic reality test.
- Restore the multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the FLSA.
- Ensure that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.
- Revert to the longstanding interpretation of the economic reality factors. These factors include the investment, control and opportunity for profit or loss factors. Whether the individual’s work is “integral” to the putative employer’s business is also included.
- Assist with the proper classification of employees and independent contractors under the FLSA.
- Rescind the 2021 Independent Contractor Rule.
If all of this sounds familiar, it is because the proposed rule would codify an Administrator’s Interpretation that was issued by the Obama Administration DOL in 2015 and that was rescinded by the Trump Administration DOL in 2017. See “restore,” “revert,” or in other words, “back and forth and back and forth.”
While it is important to remember that this is only a proposed rule at this point, and must proceed through the normal notice and comment period, it is a good reminder that there are rules regarding who is an employee and who is an independent contractor. In addition to the WHD proposed rule, the IRS has its own set of rules.
Some states, like Michigan, have rules too. Michigan’s rules can be viewed here.
The state of California enacted law AB 5 in 2019 that presumes an individual is an employee unless the hiring entity can prove three specific elements.
So what should employers take from this? For now at least, it is very important for employers to remember that simply calling a worker an independent contractor or even having a contract is not enough. The worker actually has to meet the statutory or regulatory test for being an independent contractor. And the penalties for misclassifying a worker can be substantial. Employers should think about these standards before deciding a worker is either one or the other. If you have any questions regarding how your workers are classified, please contact a member of Warner Norcross + Judd LLP's Labor and Employment Practice Group.