Employee or Independent Contractor? Examining the U.S. Department of Labor’s New Recommendations Concerning Independent Contractor Classification

by Stephen Fox, Associate Member, University of Cincinnati Law Review Vol. 91

I. Introduction

The United States labor force is composed of over 158 million employed workers.¹ Independent contractors, who are workers “not economically dependent on their employer for work and are in business for themselves,” make up over 10% of those employed workers under their current classification.² However, the U.S. Department of Labor (“DOL”) recently released new recommendations for classifying this sector of the work force.³ These recommendations would rescind their 2021 rules and see courts return to the historically used totality of the circumstances analysis to determine whether workers are independent contractors.⁴ The DOL argues for this transition by explaining that the newly proposed guidelines more closely comport with the requirements of the Fair Labor Standards Act of 1938.⁵

Part II of this article will provide a brief description of the Fair Labor Standards Act and how courts have historically determined whether a worker is an employee or independent contractor. Next, the article will discuss the 2021 DOL rules and compare them to the new 2022 recommendations. Lastly, Part III will analyze how this proposed shift will affect the labor market and workers’ rights.

II. Background

A. The Historical Approach to Classifying Independent Contractors

29 U.S.C.S. § 201-219, also known as the Fair Labor Standards Act (“FLSA”), was enacted in 1938 with the goal of promoting the wellbeing of the nation’s workers and its commerce.⁶ The FLSA has proven crucial to ensuring workers’ rights through actions such as guaranteeing a minimum wage,⁷ overtime pay,⁸ and employing child labor restrictions.⁹ However, these minimum wage and overtime guarantees extend only to company employees, not independent contractors.¹⁰ The FLSA does not explicitly provide a definition of independent contractors, so courts have historically employed an economic test to determine whether the worker is an employee or independent contractor by examining whether the worker is economically dependent on the employer.¹¹ If the worker is economically dependent on the employer, then they are an employee.¹² If the court does not find the worker as economically dependent, then they are an independent contractor.¹³ This test looks to the totality of the circumstances surrounding the worker’s relationship with the employer, and although there is slight variation amongst the specific factors examined between the circuits, the Sixth Circuit looks to:

1) the permanency of the relationship between the parties; 2) the degree of skill required for the rendering of the services; 3) the worker’s investment in equipment or materials for the task; 4) the worker’s opportunity for profit or loss, depending upon his skill; . . . 5) the degree of the alleged employer’s right to control the manner in which the work is performed[; and] . . . [6)] whether the service rendered is an integral part of the alleged employer’s business.¹⁴

The Sixth Circuit has noted that no one factor predominates over the rest.¹⁵ Rather, the factors are questions that help guide the court to answer whether the worker is economically dependent on the business.

B. The DOL’s Shift in Recommendations for Classifying Independent Contractors

Although with slight variations among circuits, since the passing of the FLSA, courts have each employed some form of the five-part economic reality test when determining whether a worker was an employee or independent contractor.¹⁶ However, after citing concerns over inconsistency in how the test had been employed, the DOL released new recommendations in 2021 seeking to provide a more uniform approach for businesses.¹⁷ These recommendations specified the required factors as 1) “[n]ature and degree of the individual’s control over the work;”¹⁸ 2) “opportunity for profit or loss;”¹⁹ 3) “skill required;”²⁰ 4) “permanence of the working relationship;”²¹ 5) “integrated unit;”²² 6) and “additional unlisted factors.”²³

Although relatively similar to the historical test employed by the Sixth Circuit, the largest alteration of the 2021 recommendation was the weight it placed on the first two factors.²⁴ The DOL listed the worker’s control over their work and opportunity for profit and loss as the most probative factors.²⁵ By carrying greater weight than the other components, if both of these “core factors” trend toward the same result, it is likely that a court will consider the outcome of those factors dispositive.²⁶

Alternatively, the more recent 2022 DOL recommendations would see courts return to the historically employed, economic reality test where no one factor predominates over the others.²⁷ The DOL rationalized this reversion by stating it wished to return to the department and judiciary’s long held approach towards classifying workers and provide consistent guidelines that align with decades of caselaw.²⁸

III. Discussion

The new 2022 DOL guidelines have understandably not been well received by businesses who rely on independent contractors for their labor.²⁹ The 2021 DOL guidelines and the two-factor priority test made it easier to classify workers as independent contractors.³⁰ By prioritizing the worker’s control over their work and the opportunity for profit and loss in the legal inquiry, the 2021 guidelines highlighted factors that when examined by courts, would be more likely to guide the final decision towards classifying the individual as an independent contractor.³¹ Reverting back to the totality of the circumstances test will prove costly for employers.³² Employees are generally more expensive for businesses than independent contractors, with some instances of hiring employees being 30% more costly for the employer than independent contractors.³³ Additionally, the traditional economic dependence test is likely more difficult for employers to conduct on their own.³⁴ Having five separate factors that may point in conflicting directions could easily lead to confusion when a business is determining whether a worker should receive FLSA protections.³⁵

However, these concerns do not outweigh the benefits which could be seen by workers under the 2022 recommendation. By returning to the traditional test, dramatically more workers could receive increased wages, overtime pay, and health benefits.³⁶ The largest improvements will be seen by “gig” workers, such as rideshare drivers, delivery drivers, writers, and others in the service industry.³⁷ These advances in the standard of living of a large sector of the American labor force are alone enough justification to revert back to the traditional test.

Additionally, the 2022 guidelines are by no means an extremist shift by the DOL towards worker’s rights. The DOL considered shifting to an approach employed by some states known as the ABC test, like what is seen in Dynamex Operations W., Inc. v. Superior Court, a California Supreme Court case.³⁸ Under the ABC test, all workers are initially considered employees and it is the burden of the business to prove that the worker is an independent contractor.³⁹ This test is considered the most worker friendly of all approaches, and the DOL exercised restraint by not employing this approach, which could have proved devastating to businesses.⁴⁰

IV. Conclusion

The FLSA was intended to guarantee American workers proper wages and benefits under humane conditions.⁴¹ However, by failing to provide a definition of independent contractor, the FLSA has spurred legal debate over which workers are intended to receive FLSA protections. Although there are warranted concerns by various industries, the 2022 DOL recommendations seeking to revert back to the traditional classification of independent contractors makes a needed step towards ensuring workers’ rights without employing an extremist approach.

Cover Photo by Arron Choi on Unsplash

Stephen Fox

Stephen Fox is a 3L and Articles Editor of the University of Cincinnati Law Review. He grew up in East Lansing, Michigan where he studied at Michigan State University and earned a B.A. in Economics. Stephen is particularly interested in criminal, employment, and health law.

References

1
Employee or Independent Contractor Classification Under the Fair Labor Standards Act, 87 Fed. Reg. 62218, 62265 (proposed Oct. 13, 2022) (to be codified at 29 C.F.R. 780).
2
Id.
3
Id.
4
Id. at 62219.
5
Id.
6
29 U.S.C.S. § 202.
7
29 U.S.C.S. § 206.
8
29 U.S.C.S. § 207.
9
29 U.S.C.S. § 212.
10
Employee or Independent Contractor Classification Under the Fair Labor Standards Act, 87 Fed. Reg. at 62218.
11
Id.
12
Id.
13
Id.
14
Donovan v. Brandel, 736 F.2d 1114, 1117 (6th Cir. 1984).
15
Keller v. Miri Microsystems LLC, 781 F.3d 799, 807 (6th Cir. 2015).
16
Employee or Independent Contractor Classification Under the Fair Labor Standards Act, 87 Fed. Reg. at 62218-62219.
17
Independent Contractor Status Under the Fair Labor Standards Act, 86 Fed. Reg. 1168, 1168 (proposed Jan. 7, 2021) (codified at 29 C.F.R. 780).
18
Id. at 1179.
19
Id. at 1185.
20
Id. at 1190.
21
Id. at 1192.
22
Id. at 1193.
23
Id. at 1196.
24
Id. at 1168.
25
Id.
26
Id.
27
Employee or Independent Contractor Classification Under the Fair Labor Standards Act, 87 Fed. Reg. at 62219.
28
Id.
29
Survey Closes Oct. 31: Treasury and IRS Request Comments on IRA Davis-Bacon and Apprenticeship Requirements, Associated Builders and Contractors (Oct. 26, 2022), https://www.abc.org/News-Media/Newsline/entryid/19533/abc-meets-with-omb-and-dol-staff-to-express-concerns-about-independent-contractor-proposal [https://perma.cc/ZB4X-N6A].
30
Leah Shepherd, DOL Issues Proposed Rule on Independent Contractors, SHRM (Oct. 12, 2022), https://www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/dol-proposed-rule-independent-contractors.aspx [https://perma.cc/6XVJ-RQMA].
31
Id.
32
Marc Freedman, Department of Labor’s Independent Contractor Proposal Takes Aim at Broad Array of Sole Proprietors, U.S. Chamber of Commerce (Oct. 25, 2022), https://www.uschamber.com/workforce/independent-contractors/department-of-labors-independent-contractor-proposal-takes-aim-at-broad-array-of-sole-proprietors [https://perma.cc/MD9N-285J].
33
Daniel Wiessner, Explainer: How a U.S. Rule on Independent Contracting Will Affect Workers, Businesses, Reuters (Oct. 12, 2022), https://www.reuters.com/markets/us/how-us-rule-independent-contracting-will-affect-workers-businesses-2022-10-11/ [https://perma.cc/B68K-3D49].
34
Freedman, supra note 27.
35
Id.
36
Shepherd, supra note 25.
37
Id.
38
Employee or Independent Contractor Classification Under the Fair Labor Standards Act, 87 Fed. Reg. at 62269.
39
Dynamex Operations W. v. Superior Court, 4 Cal. 5th 903, 955 (Cal. 2018).
40
Employee or Independent Contractor Classification Under the Fair Labor Standards Act, 87 Fed. Reg. at 62271.
41
29 U.S.C.S. § 202.