On October 11, 2022, the Wage and Hour Division of the U.S. Division of Labor (DOL) issued a Discover of Proposed Rulemaking that might make it tougher for employers to correctly classify staff as impartial contractors beneath the federal Truthful Labor Requirements Act (FLSA).
The proposed rule clarifies the relevant take a look at for figuring out whether or not a employee is an worker or an impartial contractor beneath the FLSA and seeks to rescind the extra employer-friendly take a look at issued in 2021 by the Trump administration. The “totality of the circumstances” evaluation introduced by the proposed rule represents a return to a extra stringent normal that employers should meet with a view to keep away from potential legal responsibility for impartial contractor misclassification.
The proposed rule is scheduled for official publication within the Federal Register on October 13, 2022, after which the general public may have 45 days to remark.
The Present 2021 Rule Issued by the Trump Administration
On January 6, 2021, in the course of the closing days of the Trump administration, the DOL revealed a rule (2021 Rule) asserting a five-factor “financial realities” take a look at used to find out whether or not a employee is in enterprise for him-or-herself (and due to this fact an impartial contractor) or economically depending on an employer (and due to this fact an worker). The 5 elements are:
- The character and diploma of the employee’s management over the work;
- The employee’s alternative for revenue or loss;
- The quantity of ability required for the work;
- The diploma of permanence within the working relationship; and
- Whether or not the work is a part of an built-in unit of manufacturing.
The 2021 Rule closely emphasised the primary two elements, which have been designated as “core elements” to be accorded extra probative weight than the others. Beneath the 2021 Rule, if a employee workouts substantial management over key elements of the efficiency of the work and has a chance for revenue and loss (apart from by working extra hours or quicker), the primary two elements weigh in favor of impartial contractor classification, and it’s “extremely unlikely” the three remaining elements may outweigh the primary two elements.
How Does the New Proposed Rule Differ From the 2021 Rule?
The DOL’s proposed rule would return a “totality-of-the-circumstances” framework to the financial actuality take a look at. The proposed rule does away with “core elements,” and lists the next six non-exhaustive elements to be absolutely and equally thought-about:
- The employee’s alternative for revenue or loss based mostly on his or her use of managerial ability;
- Whether or not the employee makes capital or entrepreneurial investments associated to the efficiency of labor, and in that case, whether or not such funding relative to the employer’s funding signifies the employee is an impartial enterprise;
- Diploma of permanence within the work relationship;
- Nature and diploma of management exercised over the efficiency of labor;
- Extent to which the work carried out is an integral a part of the employer’s enterprise; and
- Talent and initiative, together with whether or not a employee makes use of specialised abilities to carry out the work.
Financial dependence stays the last word inquiry for figuring out whether or not a employee is an impartial contractor. Nonetheless, the brand new proposed rule expands the evaluation and requires consideration of all elements with equal probative weight, making it tougher for impartial contractor classifications to outlive authorized problem.
Information of the proposal introduced a drop in share worth for a lot of corporations that rely upon impartial contractors to maintain their companies working. If applied, the affect of the brand new rule will likely be felt throughout all industries, as all employers should navigate a extra complicated and stringent take a look at to keep away from the numerous legal responsibility that may outcome from employee misclassification.
The proposed rule should nonetheless work its manner via the regulatory discover and remark course of earlier than it’s formally adopted and should face authorized challenges if and when it turns into closing. As at all times, we’ll monitor additional developments and may help employers navigate more and more difficult workforce points.