{"id":10672,"date":"2026-05-13T16:14:13","date_gmt":"2026-05-13T16:14:13","guid":{"rendered":"https:\/\/usatrustedlawyers.com\/blog\/department-of-labor-proposes-new-rule-on-classifying-workers-as-employees-or-independent-contractors\/"},"modified":"2026-05-13T16:14:13","modified_gmt":"2026-05-13T16:14:13","slug":"department-of-labor-proposes-new-rule-on-classifying-workers-as-employees-or-independent-contractors","status":"publish","type":"post","link":"https:\/\/usatrustedlawyers.com\/blog\/department-of-labor-proposes-new-rule-on-classifying-workers-as-employees-or-independent-contractors\/","title":{"rendered":"Department Of Labor Proposes New Rule On Classifying Workers As Employees Or Independent Contractors"},"content":{"rendered":"\n
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On September 22, 2020, the U.S. Department of Labor (the \u201cDepartment\u201d) announced a proposed rule setting forth a test to determine whether a worker should be classified as an employee or an independent contractor under the Fair Labor Standards Act (the \u201cFLSA\u201d or the \u201cAct\u201d).\u00a0 The proposed rule can be found here<\/a><\/strong>.\u00a0 Although the Department has issued guidance in the past on this subject, and has issued regulations addressing the meaning of independent contractor within specific industries, it has never promulgated a formal rule.\u00a0 Consistent with the approach taken by numerous courts when considering a worker\u2019s classification under the FLSA, the proposed rule would focus the inquiry on two \u201ccore factors\u201d:\u00a0 (i) \u201cthe nature and degree of the worker\u2019s control over the work\u201d and (ii) \u201cthe worker\u2019s opportunity for profit or loss based on initiative and\/or investment.\u201d\u00a0 According to the Department, if both of these core factors point to the same conclusion, \u201ctheir combined weight is substantially likely to outweigh the combined weight of other factors that may point towards the opposition classification.\u201d\u00a0 \u201cIn other words, where the two core factors align, the bulk of the analysis is complete.\u201d\u00a0<\/p>\n

I. Background<\/strong><\/p>\n

The FLSA requires employers to pay nonexempt employees at least the federal minimum wage and provide overtime pay for each hour worked over 40 hours per week.\u00a0 These requirements, however, do not apply to independent contracts.\u00a0 Although the FLSA does not define \u201cindependent contractor,\u201d it defines an \u201cemployee\u201d as \u201cany individual employed by an employer.\u201d\u00a0 29 U.S.C. \u00a7 203(e)(1).\u00a0 The Act in turn defines \u201cemployer\u201d as \u201cany person acting directly or indirectly in the interest of an employer in relation to an employer,\u201d\u00a0id<\/em>. \u00a7 203(d), and \u201cemploy\u201d to \u201cinclude[] to suffer or permit to work,\u201d\u00a0id<\/em>. \u00a7 203(g).\u00a0 Given that the FLSA\u2019s definitions provide little guidance on whether a worker is an independent contractor or employee, courts have developed multi-factor tests designed to evaluate the \u201ceconomic realities\u201d of the worker\u2019s relationship with the employer.<\/p>\n

As we have previously discussed\u00a0here<\/strong>, on July 15, 2015, during the Obama administration, the Department issued an Administrative Interpretation setting forth the Department\u2019s position on when workers may be considered independent contractors instead of employees covered by the FLSA.\u00a0 The guidance stated that \u201cmost workers are employees under the FLSA\u2019s broad definition\u201d of \u201cto employ\u201d and enunciated a rigorous test for when workers could be considered independent contractors, taking the position that the main focus of the economic realities test, irrespective of the particular factors used by various courts, should be whether the worker is economically dependent on the employer, in which case the worker should be considered an employee.\u00a0 On June 7, 2017, under the Trump administration, the Department withdrew the Obama-era guidance in an announcement that can be found\u00a0here<\/a><\/strong>.<\/p>\n

II. The Proposed Rule<\/strong><\/p>\n

In its September 22, 2020 proposal, the Department stated that the \u201cmultifactor economic realities test\u201d \u201cas currently applied, has proven to be unclear and unwieldy\u201d and therefore proposed \u201cto promulgate a regulation that explains the contours of the economic reality test and clarifies and sharpens a test that has become less clear and consistent through decades of case-by-case administration in the courts of appeals.\u201d\u00a0 The Department also stated that the new rule, if finalized, would replace \u201cprevious industry-specific interpretations\u201d[1]<\/a>\u00a0and constitute \u201cthe Department\u2019s sole and authoritative interpretation of independent contractor status under the FLSA.\u201d\u00a0<\/p>\n

The proposed rule would reflect an \u201ceconomic reality\u201d test that \u201cconsiders whether a worker is in business for him or herself (independent contractor) or is economically dependent on a putative employer for work (employee).\u201d\u00a0 According to the proposed rule, the \u201ctouchstone\u201d of the test would be \u201ceconomic dependence,\u201d which \u201cis best understood in terms of what it is not.\u201d\u00a0 Therefore, the Department proposes to \u201cexclude[] individuals who, as a matter of economic reality, are in business for themselves\u201d from the definition of employee, and explains that \u201cthe key question is whether workers are \u2018more closely akin to wage earners,\u2019 who depend on others to provide work opportunities, or \u2018entrepreneurs,\u2019 who create work opportunities for themselves.\u201d<\/p>\n

This \u201ceconomic reality\u201d test would consist of five factors, which are discussed in more detail below.\u00a0 The first two factors are considered \u201ccore factors\u201d that \u201chelp determine if a worker is economically dependent on someone else\u2019s business or is in business for themselves.\u201d\u00a0 These factors are (i) \u201cthe nature and degree of the worker\u2019s control over the work\u201d and (ii) \u201cthe worker\u2019s opportunity for profit or loss based on initiative and\/or investment.\u201d\u00a0 The proposal states that these factors \u201care highly probative to the inquiry because the ability to control one\u2019s work and to earn profits and risk losses strikes at the core of what it means to be an entrepreneurial independent contractor, as opposed to a \u2018wage earner\u2019 employee.\u201d\u00a0<\/p>\n

The remaining three factors are:\u00a0 (i) \u201cthe amount of skill required for the work,\u201d (ii)\u00a0\u201cthe degree of permanence of the working relationship between the worker and the potential employer,\u201d and (iii) \u201cwhether the work is part of an integrated unit of production.\u201d\u00a0 The proposal states that, although these three factors \u201care also probative depending on the circumstances,\u201d they \u201cshould be evaluated in the context of the[] two core factors.\u201d\u00a0 The proposal adds that \u201cif both proposed core factors point towards the same classification\u2014whether employee or independent contractor\u2014there is a substantial likelihood that the individual\u2019s classification is accurate\u201d because \u201cit is highly unlikely for the other, less probative factors to outweigh the combined weight of the core factors.\u201d<\/p>\n

The proposed rule emphasizes that \u201cthe actual practice of the parties involved,\u201d \u201cboth of the worker . . . and of the potential employer,\u201d would be \u201cmore relevant than what may be contractually or theoretically possible.\u201d\u00a0 The proposal states that \u201cthe primacy of the parties\u2019 actual practice applies to every potentially relevant factor, and it can weigh in favor of either an employee or independent contractor relationship,\u201d though the proposed rule \u201cdoes not suggest that what is contractually or theoretically possible in a work arrangement is irrelevant.\u201d<\/p>\n

III. The Five Factors<\/strong><\/p>\n

A. The nature and degree of the worker\u2019s control over the work.<\/p>\n

With respect to the first factor, \u201cthe nature and degree of the worker\u2019s control over the work,\u201d the proposal provides examples \u201cof an individual\u2019s substantial control,\u201d including \u201csetting his or her own work schedule, choosing assignments, working with little or no supervision, and being able to work for others, including a potential employer\u2019s competitors.\u201d\u00a0 The proposal states that \u201can individual worker\u2019s \u2018substantial control of the key aspects\u2019 of the work weighs in favor of independent contractor classification \u2018even if the worker is not solely in control of the work,\u2019\u201d whereas the \u201ccontrol factor would weigh in favor of classification as an employee to the extent that a potential employer, as opposed to the individual, exercises substantial control over key aspects of the work.\u201d\u00a0 The proposal also \u201cclarifies that requiring an individual to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships) does not constitute control that makes the individual more or less likely to be an employee under the Act.\u201d<\/p>\n

B. The individual\u2019s opportunity for profit or loss.<\/p>\n

With respect to the second factor, \u201cthe individual\u2019s opportunity for profit or loss,\u201d the proposal states that \u201cthe worker\u2019s meaningful capital investments may evince opportunity for profit or loss,\u201d but \u201cinvestment is not the only way to satisfy this factor because workers who \u2018invest little\u2019 may nonetheless have an opportunity for profit through the exercise of personal initiative.\u201d\u00a0 Therefore, this factor \u201cwould weigh towards the individual being classified as an independent contractor if he or she has an opportunity for profit or loss based on either or both:\u00a0 (1) the exercise of personal initiative, including managerial skill or business acumen; and\/or (2)\u00a0the management of investments in, or capital expenditure on, for example, helpers, equipment, or material.\u201d<\/p>\n

C. Skill required by the individual.<\/p>\n

With respect to the \u201cskill required\u201d factor, the Department \u201cproposes to clarify that this factor should focus on the \u2018amount of skill required,\u2019\u201d but should \u201cnot include a consideration of \u2018initiative\u2019\u201d \u201cor the related concepts of judgment and foresight,\u201d as some courts and the Department have previously done, \u201cbecause facts related to initiative are considered as part of the control and opportunity for profit or loss factors.\u201d\u00a0 This factor would \u201cweigh[] in favor of the individual being an independent contractor to the extent the work at issue requires specialized training or skill that the potential employer does not provide,\u201d and it would \u201cweigh[] in favor of the individual being an employee to the extent the work at issue requires no specialized training or skill and\/or the individual is dependent upon the potential employer to equip him or her with any skills or training necessary to perform the job.\u201d<\/p>\n

D. Investment by the individual in facilities for work.<\/p>\n

With respect to the \u201cdegree of permanence\u201d factor, the proposal \u201cfocus[es] . . . on the continuity and duration of the working relationship,\u201d \u201cwithout referencing the exclusivity of the relationship between the worker and potential employer,\u201d which some courts have considered with respect to this factor, because \u201c[t]he control factor already considers whether a worker has freedom to pursue external opportunities by working for others.\u201d\u00a0 Under the proposed rule, \u201c[t]he permanence factor would weigh in favor of an individual being classified as an independent contractor where his or her working relationship with the potential employer is by design definite in duration or sporadic,\u201d and it \u201cwould weigh in favor of classification as an employee where the individual and the potential employer have a working relationship that is by design indefinite in duration or continuous.\u201d<\/p>\n

E. Whether the work is part of an integrated unit of production.<\/p>\n

With respect to the \u201cintegrated unit\u201d factor, the proposal clarifies that it \u201cshould\u00a0.\u00a0.\u00a0.\u00a0consider \u2018whether the work is part of an integrated unit of production,\u2019\u201d rather than considering \u201cthe extent to which services rendered are an integral part of the [potential employer\u2019s] business,\u201d as some courts and the Department have considered previously.\u00a0 Under the proposed rule, \u201c[t]his factor weighs in favor of employee status where a worker is a component of a potential employer\u2019s integrated production process, whether for goods or services,\u201d whereas \u201cif the individual\u2019s work is not integrated into the potential employer\u2019s production process, the factor would favor classification as an independent contractor.\u201d<\/p>\n

The Department is only providing for a 30-day comment period on the proposed rule, which has drawn criticisms from Democrats.\u00a0 Reportedly, a Department official told reporters that the Department plans to finalize the rule by year-end, before the end of President Trump\u2019s first term.<\/p>\n

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[1]<\/a> \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 The Department stated that its proposed rule would not replace the economic reality analysis \u201cfor determining independent contractor status under the Migrant and Seasonal Agricultural Worker Protection Act.\u201d<\/div>\n<\/div><\/div>\n","protected":false},"excerpt":{"rendered":"

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