Once again changes are being proposed to one of the federal independent contractor tests, that which determines whether an individual is an employee or contractor under the Fair Labor Standards Act (“FLSA”). The USDOL proposes to rescind the 2021 rule which made it easier to classify workers as independent contractors.

The DOL provided history and context to the issue and its decision to propose the rule change:

For more than 7 decades, the Department and courts have applied an economic reality test to determine whether a worker is an employee or an independent contractor under the FLSA. The ultimate inquiry is whether, as a matter of economic reality, the worker is either economically dependent on the employer for work (and is thus an employee) or is in business for themself (and is thus an independent contractor). 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. There is significant and widespread uniformity among the circuit courts in the application of the economic reality test, although there is slight variation as to the number of factors considered or how the factors are framed. These factors generally include 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.

Under the 2021 rule, which was issued in January in the waning days of the Trump administration, two of the five commonly identified factors—the nature and degree of control over the work and the worker’s opportunity for profit or loss—were designated as “core factors” which would carry greater weight in the analysis. The other three less probative non-core factors were the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the employer, and whether the work is part of an integrated unit of production.

The DOL expressed its view that the 2021 Rule is not consistent with the language and intent of the FLSA and departs from decades of case law applying the economic reality test. It concluded that the 2021 rule provisions narrow the economic reality test by limiting the facts that may be considered as part of the test, facts which the DOL believes are relevant in determining whether a worker is economically dependent on the employer for work or in business for themself.

The proposed Rule returns to a totality-of-the circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity. The DOL also proposes to return the consideration of investment to a standalone factor, provide 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), and return to the longstanding interpretation of the integral factor, which considers whether the work is integral to the employer’s business.

What does this mean for businesses and for workers who are now part of the ever growing “gig” economy?

First, and most importantly, it may not mean much in states like Massachusetts and other New England states in which the so-called ABC test is primarily or exclusively used. The ABC test is a three-factor test in which all three factors must be met in order for an induvial to be deemed a contractor under state wage and hour, worker’s compensation, and unemployment law. It is therefore critical for employers to be very familiar with their own state laws. In other states, and in situations where federal law will be applied (such as a USDOL audit), it will be more challenging for a worker to pass as an independent contractor. The bottom line is that the analysis needs to include a careful review of whether the worker is truly independent, controls his or her own work and ability to make or lose money, and is free to perform the services for anyone at any time. The worker must truly be entrepreneurial and independent. Carefully drafted independent contractor agreements are therefore essential.