Labor Department Proposes New Employer-Friendly Rule on Independent Contractors

The Department of Labor is proposing a new regulation that they say will simplify the determination of when a worker is an independent contractor instead of an employee.

This new rule, which is being fast-tracked with a shorter comment and adoption period, appears to make it easier for employers to legally classify workers as independent contractors rather than employees covered by federal minimum wage and overtime law.  This expands the DOL’s efforts to loosen restrictions on independent workers, as we reported last year in our article entitled Labor Department Says Gig Workers Are Contractors, Not Employees.

The Proposal

Currently, the employee v. independent contractor analysis is based on the assessment of multiple factors, with none being deemed dispositive or entitled to greater weight.  The proposed rule focuses on the “economic realities” and culls down the test to five essential questions, with the following two being given the greatest weight:

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

The other three factors, deemed “guideposts” to aide in the analysis, will typically be applied when the two primary factors conflict.  These guideposts are:

  • The amount of skill required in the work;
  • The degree of permanence in the work relationship; and
  • Whether the work is part of an integrated unit of production.

The Rationale

The DOL has stated that the new rule is intended to bring clarity and consistency to the determination of contractor status.  Secretary of Labor Eugene Scalia explained that the current regulations create a bias toward workers being classified as employees, and that he seeks a more balanced approach that recognizes the “powerful reasons why some workers prefer to be independent, rather than accountable to a company as its employee.”  He says this new rule will respect the decision that many people make “to pursue the freedom and entrepreneurialism associated with being an independent contractor.”

It is important to recall that regulations only represent how the administrative agencies interpret legislation, and that courts remain free to interpret those same laws consistent with their own analysis and prior precedential caselaw.  Nevertheless, these agency determinations are often accorded significant weight in the courts and therefore are very instructive in determining how the laws will apply to any particular case.

The proposal offers only a 30-day public comment period in the hope of moving this process quickly and installing the new regulation prior to the presidential election.

Bottom Line

This new regulation, if enacted, will certainly bring greater certainty to the determination of contractor status and should help reduce the number of lawsuits based on misclassification.

We will watch for further developments.