New Independent Contractor Rules Proposed

The U.S. Department of Labor (DOL) published a proposed rule in the Federal Register on Oct. 13, affecting independent contractor vs. employee classification under the Fair Labor Standards Act (FLSA). Assuming the DOL moves forward with the rule following the comment period, it will likely take effect in late 2023 or early 2024.

Under the proposed rule, employers would use a multifactor “economic realities” test to classify workers, focusing on whether a worker is economically dependent on the employer or in business for themselves. The proposed test is largely a return to the economic realities test previously used by the DOL, and serves to rescind the 2021 Independent Contractor Rule, which would have made it easier for businesses to classify workers as independent contractors. Factors in the economic realities test include:

1. the nature and degree of control over the manner in which the work is performed

2. the worker’s investment in materials and equipment required to do the job

3. the extent to which the worker’s opportunity for profit and loss is determined by managerial skill

4. the level of skill required for the job

5. the degree of permanence of the relationship

6. whether the work performed is an integral part of the hiring party’s business.

If an ‘independent contractor’ does not meet the requirements of this test, they must be treated as an employee for FLSA purposes.

Under the FLSA, if an employer misclassifies a worker as an independent contractor, the employer must pay minimum wage and overtime if the employee is non-exempt. Willful violations of the FLSA incur a fine up to $10,000, imprisonment up to six months, or both.

We suggest that you have a written contract with your independent contractors. Don’t provide them with tools or equipment, and make all checks payable to their company name.