And here we go again! With every modern-time presidential administration comes independent contractor rule changes. What’s ahead for 2023?
For more than seven decades, the Fair Labor Standards Act (FLSA) economic reality test was central to determining whether a worker is an employee or an independent contractor. At the center is the question of “economic dependence.” Is the worker economically dependent on the employer for work, or are they in business for themselves?
“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,” states the U.S. Department of Labor’s Wage and Hour Division.
For all its longevity, the test is far from perfect or even well-understood. It’s beholden to interpretation based on a dizzying combination of factors, including, as the DOL states, “the opportunity for profit or loss, investment, permanency, the degree of control by the employer over the worker, whether the work is an integral part of the employer’s business, and skill and initiative.”
In the waning hours of the Trump administration, the DOL published a new “Independent Contractor Status Under the Fair Labor Standards Act” (2021 IC Rule), which narrowed the test down to five factors. Two factors outweigh the others: the nature and degree of control over the work and the worker’s opportunity for profit or loss. The rule was challenged and even rescinded but was eventually reinstated last March.
Enter the Biden administration and a proposed rule that brings back the multiple economic reality factors as a totality-of-the-circumstances test. More than 55,000 comments were logged before the comment period closed in December 2022. Now we wait for the final rule. In the meantime, fear and chaos seem to be ensuing, with concerns including:
“What our current workforce considers an independent contractor may be significantly impacted by this proposal. The rule change could have wide-ranging implications for employees, freelancers and employers alike,” says Business News Daily.
“The proposal would require that workers be considered employees, entitled to more benefits and legal protections than contractors, when they are ‘economically dependent’ on a company. It could have wide-ranging impacts on company profits and hiring, household incomes and worker quality of life,” says Reuters.
The U.S. Chamber is concerned that the new rule could be devastating to small businesses “which rely on independent contractors’ expertise to grow their businesses” and could have “potentially dramatic consequences for entire industries.” The U.S. Chamber adds that “policies that inhibit the formation of independent contractors have the opposite effect: muzzled competition, stunted incomes, decreased flexibility and opportunity, and significant job loss.” Additionally, the proposed rule “hinders worker freedom and ignores economic development.”
It all sounds overwhelming and terrifying. But is it?
First, industry experts agree the proposed rule isn’t as severe as it could have been. It’s no secret President Biden is fond of California’s stringent “ABC Test” for independent contractor relationships, and many feared the administration would go all-in on a similar policy. It didn’t. Not really. But the second factor in testing out of being an employee in California, “the worker performs work that is outside the usual course of the hiring entity’s business,” can be tricky to prove (one could ask why you would need any workers who perform work outside the usual course of your business). Bloomberg Law points out a factor in the proposed federal rule, “whether the work is an integral part of the employer’s business, and skill and initiative,” could be an attempt at mimicking the California test. If that raises concerns with your business, take a close look at that factor in the final rule.
Secondly, enforcement is expected to primarily take aim at “gig” companies and specific industries that rely heavily on independent contractor relationships. Independent contractors that pass the decades-old FLSA generalities with flying colors will likely still pass. But organizations that rely on independent contractors as a central part of their workforce should not be surprised at being targeted—they have been for many years now. Of course, rideshare and food delivery companies that have become the poster children of the law will be watched closely. Trucking, construction, restaurant, technology, and other companies that rely heavily on large numbers of independent contractors may also be significantly affected. That being said, no employer is immune from enforcement. Any worker can report a business if they feel they are unfairly being classified as an independent contractor.
If you hire independent contractors, review those independent contractor relationships with your legal team. If those arrangements sit uncomfortably in the grey area of compliance, a different classification might be more appropriate, including temporary and temp-to-hire arrangements.
