Labor Department Proposes New Test for Employee Designation

The U.S. Department of Labor Wage and Hour Division has issued a proposed rule to redefine who is an employee as opposed to an independent contractor.  The proposed rule would apply to those legal areas where DOL has jurisdiction, such as minimum wage and overtime (only employees are entitled to these benefits).  Federal agencies, such as the Internal Revenue Service and the National Labor Relations Board, have their tests for employee status.

The DOL proposal would not affect the exemption from overtime for drivers subject to the U.S. Department of Transportation’s driver’s hours of service rules, as that provision is mandated by statute in the Fair Labor Standards Act and may not be changed by agency rulemaking.

In January 2021, the Labor Department, in the last days of the Trump Administration, issued an independent contractor classification rule that included a five-factor test but noted that the employer’s degree of control over the work and the worker’s opportunity for profit or loss were designated as “core factors” are the most probative and carry greater weight in the analysis.

The Biden Administration first delayed the implementation of the Trump Administration rule and then withdrew the rule on May 6, 2021.

The new Wage and Hour Division proposal states that to determine employee status, DOL will inquire 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 themselves (and is thus an independent contractor).  To answer this ultimate inquiry of economic dependence, DOL asserts that 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.

These factors generally include the worker’s 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.  The new proposal would not assign any predetermined weight to any factors.