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On Tuesday, October 11, the Department of Labor (DOL) issued new guidelines for categorizing independent contractors and employees per the Fair Labor Standards Act. The proposed rule is an overhaul of the existing guidelines and is similar to the rule adopted during the Obama administration. In a nutshell, it will make it more difficult for companies to classify workers as contractors instead of employees.

What the Rule Stipulates 

The new blueprint urges an analysis of the “totality-of-the-circumstances” for a specific worker instead of looking at particular criteria. As a result, policies for categorizing an independent contractor are much tighter.

Before deeming workers to be independent contractors, employers would be required to apply an “economic realities” test. Using this test, employers would determine several factors, including the following:

  • The level of skill is necessary for the work
  • The permanence of the working relationship
  • If the worker invests in equipment or other materials needed for the work
  • If the work is integral to the employer’s business

The proposed rule also directs employers to consider exclusivity as a part of the permanency factor. However, it acknowledges that a worker simply having multiple jobs should not necessarily indicate independent contractor status. 

During the Trump administration, the guidelines suggested that employers look at workers’ control over their responsibilities and their opportunity for turning a profit or suffering a loss under the arrangement. Those factors will still be considered but do not carry as much weight as before.

In addition, the proposed rule does not include the ABC test. This is a three-point evaluation that employers must satisfy to classify a worker as an independent contractor. DOL officials have stated they do not have the authority to enact such a test without congressional authorization. Previously, the Biden administration had delayed and tried to rescind the classification criteria from the Trump administration. However, in March, a federal judge called for the reinstatement of that criteria. This current proposal would formally end the Trump-era guidelines.

What This Means for Companies

As you likely know, federal law guarantees that employees have certain rights, such as minimum wage, payroll tax contributions, and overtime pay. However, independent contractors are not afforded such provisions. In addition, full-time employees often have benefits, such as medical insurance and paid vacation, which independent contractors do not.

If this rule is finalized, many businesses that rely on independent contractors will be hit hard. Among them are construction and trucking companies, as well as ride-hailing services Uber and Lyft. For companies like these, revamping their business model will likely increase labor costs, and those costs will be passed along to consumers.

Some business organizations have argued that using independent contractors is necessary for today’s economy. They say that without that flexibility, they cannot survive. For example, the National Retail Federation criticized the proposed rule, calling it “unwarranted and unnecessary.” The group fears that the rule will lead to confusion and lawsuits, while hurting business innovation. 

The Reasons Behind the Rule

For many years, organized labor and Democratic lawmakers have argued that some employers improperly classify their employees as independent contractors to avoid specific compensation and working condition requirements. Secretary of Labor Marty Walsh explained this issue: “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.” 

With the proposed rule, the DOL claims it does not intend to target any particular companies or industries. Instead, the agency states that these guidelines will align with prior court rulings. DOL Solicitor General Seema Nanda offered this summary: “The 2021 independent contractor rule is out of sync with what the courts have been saying for decades. And we believe that disconnect creates confusion among employers and increases the likelihood of misclassification, which hurts workers and their families.” 

What Happens Next

Before it is finalized, the proposed rule is open to a public comment period. It will be published in the Federal Register on October 13. Submissions can be made electronically or by mail and are due by November 28.

If you are concerned about how this new rule could affect your business, take the time to learn more. Read the proposed rule and determine which workers’ status could be in jeopardy.