U.S. Department of Labor Releases New Proposed Rule Updating Whether a Worker is an Employee or Independent Contractor

The U.S. DOL just released a new proposed rule (“Rule”) that would update the analysis for determining whether a worker is an independent contractor or an employee under federal law, receding from its 2021 Independent Contractor Rule.

Noting that the Department and courts have applied an economic reality test to determine whether a worker is an employee or an independent contractor under the FLSA for more than seven decades, the Department said the ultimate inquiry is whether, as a matter of economic reality, the worker is either economically dependent on the employer for work (and is thus an employee) or is in business for themselves (and is thus an independent contractor). To answer this ultimate inquiry of economic dependence, the courts and the Department have historically conducted a totality-of-the circumstances analysis, considering multiple factors to determine whether a worker is an employee or an independent contractor under the FLSA (as opposed to the 2021 Independent Contractor Rule which used a weighted “core factors” test.)

The Department decided it is appropriate to set forth an analysis for determining employee or independent contractor status under the Act that is more consistent with existing judicial precedent.
In the new rule, the Department is to return to a totality-of-the circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity.

The proposed rule would establish a six-step “economic realities” test for determining whether a worker is an employee or independent contractor.

1. Opportunity for profit or loss depending on managerial skill.
2. Investments by the worker and the employer
3. Degree of permanence of the work relationship
4. Nature and degree of control
5. Extent to which the work performed is an integral part of the employer’s business
6. Skill and initiative

The Rule clarifies that “these six factors are not exhaustive” and “Additional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA, if the factors in some way indicate whether the worker is in business for themselves, as opposed to being economically dependent on the employer for work.”