This Compliance Alert has been prepared by Seth Capper of the attorneys at Maynard, Cooper and Gayle.

On October 13, the DOL’s Wage and Hour Division (“WHD”) published a Notice of Proposed Rulemaking, wherein the WHD proposed new regulations for determining whether a worker is classified as an employee or an independent contractor for purposes of the Fair Labor Standards Act (“FLSA”). The new proposed regulations would rescind and replace regulations that were issued in final form under the Trump administration in January 2021. The 2021 regulations were subsequently frozen, delayed, and withdrawn under the Biden administration, but a court later vacated the withdrawal and reinstated the regulations back to their original effective date of March 8, 2021.


What did the 2021 regulations say?

The 2021 regulations took a more “streamlined” approach to the longstanding “economic reality” test, identifying five factors to guide the inquiry into whether a worker is an employee or an independent contractor. Two of those five factors—(1) the nature and degree of control over the work and (2) the worker’s opportunity for profit or loss—were designated as “core” factors that carried greater weight and probative value. The other three factors—(1) the amount of skill required for the work; (2) the degree of permanence of the working relationship; and (3) whether the work is part of an integrated unit of production—were designated as less probative, non-core factors.


What do the new proposed regulations say?

The new proposed regulations would restore a “totality-of-the-circumstances” approach in assessing the economic reality of the working relationship, requiring consideration of six factors (rather than five) and requiring that equal weight be given to all six factors (rather than giving greater weight to two of the five factors, as in the 2021 regulations). The six factors under the new proposed regulations are as follows:

  1. The worker’s opportunity for profit or loss due to managerial skill;
  2. Investments by the worker and the employer;
  3. The degree of permanence of the work relationship;
  4. The nature and degree of control over the work;
  5. The extent to which the work performed is an integral part of employer’s business; and
  6. Whether the worker uses specialized skills and whether those skills contribute to business-like initiative.

Other factors may also be relevant. The DOL explains in the preamble that the ultimate inquiry is whether the worker is economically dependent on the employer for work (and, thus, is an employee) or whether the worker is in business for himself or herself (and, thus, is an independent contractor).

According to the DOL, the proposed regulations provide a framework for analyzing independent contractor status that is “more consistent with longstanding judicial precedent” than the approach in the 2021 regulations. Among other things, the proposed regulations would align the DOL’s approach with the courts’ FLSA interpretation and the economic reality test, restore the multifactor, totality-of-the-circumstances analysis, and ensure that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.


Why are these rules important?

The FLSA generally requires that covered employers pay nonexempt employees at least the Federal minimum wage for every hour worked, and at least one and one-half times the employee’s regular rate of pay for all hours worked beyond 40 in a workweek. The FLSA also requires covered employers to “make, keep, and preserve” certain records regarding employees. The FLSA’s protections, however, do not apply to independent contractors; so, covered employers are not required to pay independent contractors minimum wage or overtime, or keep work records, as required under the FLSA.

Nevertheless, it is important to note that a worker’s designation as an employee vs. an independent contractor is significant for many other reasons beyond the FLSA. The new proposed regulations discussed above only apply for purposes of the FLSA. Most employee benefit plan rules determine employee status under ERISA or the Code (not the FLSA), often in conjunction with the common-law standards. It is important to properly classify workers under the appropriate set of rules—particularly for purposes of the Code’s rules regarding retirement plans, cafeteria plans, and employer shared responsibility penalties. For ERISA health and welfare plans, in general, it is not advisable to extend coverage to independent contractors or other workers who are not an employer’s common-law employees. Doing so can cause tax issues and the risk of inadvertently creating a MEWA.


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This blog and its contents are not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.