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Employee or independent contractor: the new proposed US test

Global
25.10.22
3
Written by
FordHarrison LLP, nationwide U.S. law firm with a singular focus on HR law.
How to assess whether a worker is an employee or an independent contractor has been a matter of controversy in the US in recent years, and the rapid expansion of the gig economy has put it in the spotlight. Now the Department of Labor has proposed a new rule, which will require case-by-case analysis of a set of factors.

Executive summary

On 11 October 2022, the United States Department of Labor (DOL) announced that it will publish a notice of proposed rulemaking that would assist employers in classifying workers as employees or independent contractors under the Fair Labor Standards Act (FLSA). The DOL believes that the new rule will be more consistent with longstanding judicial precedent on which employers have relied. 

Earlier this year, the United States District Court for the Eastern District of Texas ruled that the Biden Administration violated the Administrative Procedure Act (APA) by attempting to rescind the Trump Administration’s 2021 Independent Contractor Status under the Fair Labor Standards Act rule (the ‘2021 Independent Contractor Rule’) (see here for more details).  

The 2021 Independent Contractor Rule identified five economic reality factors to determine whether a worker was an employee or independent contractor. The factors that carried the most weight in that analysis were the nature and degree of control over the work and the worker’s opportunity for profit or loss. The 2021 Independent Contractor Rule made it easier for businesses to classify workers as independent contractors. 

The DOL is now proposing to rescind the 2021 Independent Contractor Rule, eliminate the use of ‘core factors’ and, instead, return to conducting a totality-of-the-circumstances analysis in which the economic reality factors are not assigned predetermined weight, and each factor is given full consideration. 

The proposed rule would establish a multi-factor economic realities test. The factors are non-exhaustive, and no one factor is decisive. The weight given to each factor will depend on the facts and circumstances of a particular case. The factors include the following: 

  • opportunity for profit or loss depending on managerial skill; 
  • investments by the worker and the employer; 
  • degree of permanence of the work relationship; 
  • nature and degree of control; 
  • extent to which the work performed is an integral part of the employer’s business; and 
  • skill and initiative. 

 

Additional factors may also be considered if they indicate whether the workers are in business for themselves. 

Of particular note, the proposed rule makes ‘investment’ a standalone factor again, provides additional analysis of the ‘control’ factor (including detailed discussions of how scheduling, supervision, price setting and the ability to work for others should be considered when analysing the degree of control over a worker), and returns to a traditional interpretation of the ‘integral part’ factor (which considers whether the work is integral to the employer’s business). 

The bottom line

The DOL’s announcement may have a major impact on industries that rely heavily on contract workers, particularly the gig economy. Employers must continue to be mindful of state laws (e.g., California, New Jersey, Massachusetts) that provide much more stringent tests to determine whether a worker is an independent contractor or an employee. 

The proposed rule was published in the Federal Register on 13 October 12022. The public have 45 days from that date to submit comments. 

 

#gigeconomy #platformworkers #independentcontractors #Biden #US 

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Authors
Jeffrey D. Mokotoff
Partner
FordHarrison LLP
Alyce B. Ogunsola
Senior Associate
FordHarrison LLP