U.S. Department of Labor Proposes New Rule Regarding Independent Contractors
October 25, 2022
By: Colin A. Walker
On October 13, 2022, the U.S. Department of Labor (DOL) proposed a new rule regarding independent contractors. The Proposed Rule supersedes the previous Rule issued in 2021.
Independent contractor relationships have certain advantages for employers and workers. There are tax benefits for both because independent contractors are not subject to payroll taxes such as FICA. Workers can also obtain tax benefits by writing off expenses. An additional benefit for employers is that independent contractors need not be paid overtime and are not covered by minimum wage requirements. Independent contractors are also not subject to employment discrimination and harassment laws.
However, to classify a worker as an independent contractor, certain requirements must be met. State and federal laws include multi-factored analysis to determine whether a worker is an independent contractor or an employee. Numerous court opinions have interpreted these standards, sometimes inconsistently and/or in a confusing manner. To make matters more complicated, state and federal laws impose different standards.
In recent years, the state and federal departments of labor have been aggressively investigating and enforcing misclassification of employees as independent contractors, often conducting burdensome audits and imposing stiff penalties.
The Proposed Rule adopts a totality of the circumstances, or “economic reality,” approach pursuant to which no factor carries more weight than any other. As the DOL explained in a press release, the Proposed Rule would “Revert to the longstanding interpretation of the economic reality factors,” which “include the investment, control and opportunity for profit or loss factors.”
The factors set forth in the Proposed Rule are:
- Opportunity for profit or loss based on managerial skill;
- Investments by the worker and employer;
- Degree of permanence of the worker relationship;
- Nature and degree of control;
- The extent to which the work is an integral part of the employer’s business; and
- The amount of skill and initiative required for the work.
However, the Proposed Rule makes it clear that additional factors may be considered “if they are relevant to the ultimate question of whether the workers are economically dependent on the employer for work or in business for themselves.”
Although the purpose of the proposed rule is to clarify and simply the standards which determine independent contractor status, it is far from certain that it will achieve those goals. As can be seen, the Proposed Rule adds new layers of complication to an already complicated issue.