Employee or Contractor? DOL Changes Its Mind, Once Again!

This post is part of a series sponsored by SWBC.

In October 2022, the Department of Labor (DOL) introduced a proposed new rule employers will need to follow when determining which of their workers can be considered an independent contractor under the Fair Labor Standards Act (FLSA). The rule could have far-reaching consequences, particularly for gig workers and the companies that use their services.

In 2021, the DOL adopted a rule making it easier for employers to designate their workers as independent contractors rather than employees. Under the FLSA, employees (not independent contractors) are entitled to minimum wage standards, overtime pay, and other benefits.

According to SHRM, “The DOL now is proposing to rescind the 2021 rule in which two core factors—control over the work and opportunity for profit or loss—carried greater weight in determining the status of independent contractors. Under the new proposed rule, employers would use a totality-of-the-circumstances analysis, in which all the factors do not have a predetermined weight.”

The proposed rule seeks to establish a six-step “economic realities” test to help employers determine whether a worker is an employee or independent contractor.

As a trusted insurance broker, it’s important to stay up to date on factors that could impact your customers’ business operations so you can provide the most valuable support when they come to you with questions about potential liabilities.

In this article, we’ll review the new economic realities test and share relevant excerpts from the proposed rule to help you advise your business clients on this updated employment regulation.

Executive Summary of Proposed Rule Updating Independent Contractor Requirements

According to excerpts taken from the proposed rule:

The DOL is proposing modifications to Title 29 of the Code of Federal Regulations addressing whether workers are employees or independent contractors under the FLSA. In relevant part, and as discussed in greater detail below, the Department proposes:

• Not using “core factors” and instead returning to a totality-of-the-circumstances analysis of the economic reality test that has a refined focus on whether each factor shows the worker is economically dependent upon the employer for work versus being in business for themself, does not use predetermined weighting of factors, and that considers the factors comprehensively instead of as discrete and unrelated.
• Returning the consideration of investment to a standalone factor, focusing on whether the worker’s investment is capital or entrepreneurial in nature, and considering the worker’s investments on a relative basis with the employer’s investment.
• Providing 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 analyzing the degree of control over a worker, and not limiting control to control that is actually exerted.
• Returning to the longstanding Departmental interpretation of the integral factor, which considers whether the work is integral to the employer’s business rather than whether it is exclusively part of an “integrated unit of production.”

Proposed Six-Factor Economic Realities Test to Determine Worker Status

The proposed rule recommends adopting a test that factors in at least six economic realities contributing to workers’ status, including:

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 elements are not exhaustive, but the DOL believes they should be among the main considerations when determining whether a worker must be treated as an employee or a contractor.

Partnering with a PEO Can Help Your Business Clients Avoid Employment Law Violations

Adhering to employment laws must be a top priority for your clients to avoid costly fines and protect their business, customers, and employees. Working with a trusted professional employer organization (PEO) can help their organization maintain compliance with current employment laws.

A PEO is a company that manages administrative and human resource functions for businesses. Think of it as an outsourced HR department. When your clients work with SWBC PEO, they’ll oversee the day-to-day management of their employees, and we’ll assist them with time-consuming HR tasks such as payroll, benefits administration, workers’ compensation, and compliance.

We work as a trusted partner for businesses and have the resources and expertise to ensure the job gets done right. Visit our website to learn more.

Topics Contractors