The question of whether a worker is an employee or independent contractor is in the news again, this time with an announcement by the Department of Labor that it will go back to using classification criteria in effect during the Obama Administration. 

Background. In January 2021 the Department of Labor (DOL) issued a new framework for determining whether a worker is an employee or independent contractor using the economic realities test under the Fair Labor Standards Act. The new rule, effective in March of 2021, upended years of judicial rulings applying the economic realities test using the totality-of-the circumstances factors, in which no factors are given more weight than others in making the determination of worker classification. The new rule instead emphasized the use of two “core factors” and weighted those core factors more heavily than other factors in making the determination. The two core factors are: 1) the nature and degree of the worker’s control over the work they perform; and 2) the worker’s opportunity for profit or loss based on investment in the enterprise or the worker’s initiative. 

Going Back. The new rule was subject to much criticism and in response, the DOL announced on October 13, 2022 its intention to issue a proposed rule regarding the determination of worker classification. In its announcement, the DOL stated its view that the core factors rule from 2021 does not fully comport with the Fair Labor Standards Act’s text and purpose. Therefore, the DOL proposed a return to the totality-of-the circumstances analysis as it has traditionally been applied by the courts. The proposed regulation specifically lists the following factors to be considered in determining worker classification: 

• • Opportunity for profit or loss depending on managerial skill.
• • Investment by the worker and the employer.
• • Degree of permanence of the work relationship (indefinite v. limited duration).
• • Nature and degree of control over performance of work by employer.
• • Whether work performed is an integral part of the employer’s business.
• • Whether the worker needs specialized skills.

The DOL noted that this list is not exhaustive, nor is any single factor dispositive. The DOL believes returning to the totality-of-the circumstances factors would preserve essential worker rights and provide consistency for regulated entities.

The deadline for submitting comments on the proposed rule change is November 28, 2022. 

To see the DOL Notice of Proposed Rulemaking news release click here.

For more information on IRS worker classification click here.