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DOL Issues Proposed Rule on Independent Contractors

Posted on October 17, 2022

The US Department of Labor (DOL) proposes to rescind a rule proposed last year and replace it with a rule that will more narrowly define the term “independent contractor” as used in the federal Fair Labor Standards Act. The proposed rule employs the “economic realities” test to establish a worker’s classification, and is expected to make it more difficult to designate workers as independent contractors.

The proposed economic realities test is not considered to be as stringent as the three-factor “ABC test” used in Massachusetts and in more than 30 other states. However, it is sure to cause concern for industries such as ride sharing that rely on independent contractors for delivery of services.

Under the proposed rule, an employee is any individual whom an employer “suffers, permits, or otherwise employs to work” and is intended to encompass all workers who “as a matter of economic reality, are economically dependent on an employer for work.”  To determine whether a worker is economically dependent upon an employer, a six-factor test will be used:

  1. Opportunity for profit or loss depending on managerial skill. If the worker has an opportunity for profit or loss from the engagement, the worker is more likely an independent contractor.
  2. Investment by the worker and the employer. A worker’s investment in the work that is “capital and entrepreneurial in nature” will better support a classification of independent contractor.
  3. Degree of permanence of the work relationship. Projects that are of a definite duration indicate independent contractor status.
  4. Nature and degree of control. The more control the worker has over performance of the duties (including scheduling, supervision, hiring, etc.), the more likely an independent contractor designation will stand.
  5. Whether the work is an “integral” part of the employer’s business. If the work performed is not critical, necessary, or central to the employer’s principal business, it will weigh in favor of independent contractor classification.
  6. Skill and initiative. More specialized skill points to independent contractor status.

None of these factors will be given more weight than others, and all factors will be considered in view of the economic reality of the relationship.  Additional factors may be relevant if they indicate whether the workers are in business for themselves, as opposed to being economically dependent on the employer for work.

This “totality of the circumstances” approach is a departure from the 2021 rule, which provided a similar list of factors but required that two “core” factors were to be given more weight than others. The earlier proposed rule stressed that a worker’s control over his or her work and the opportunity for profit or loss were paramount in making an independent contractor determination.

Compare this with the Massachusetts Independent Contractor Law (MGL c.149, § 148B), which uses the “ABC test” to determine whether a worker is an employee or an independent contractor.   A worker is presumed to be an employee unless all three of the following conditions are met:

  1. the individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and
  2. the service is performed outside the usual course of the business of the employer; and,
  3. the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.

The DOL invites comments on its proposed rule through November 28, 2022.

AIM members with questions about the classification of workers may call the AIM Employer Hotline at 1-800-470-6277.