Independent contractor rules are currently proposed to change – again.

Just about two (2) years ago, the U.S. Department of Labor (DOL) tried to update its classification regulations under the Fair Labor Standards Act (FLSA). Those rules have made it simpler and more attractive for employers to use independent contractors. The Rules were scheduled to go into effect on March 8, 2021. Still, the then-incoming Biden administration blocked its implementation until a federal court stepped in, ordering the rules put in place. They are currently in effect.

As of October 2022, the DOL has issued updated proposed rules that reverse the Trump administration rules. The DOL took comments on the new rules through early December 2022. It is expected that the Department of Labor to implement the new proposed rules in the Spring of 2023.

CURRENT RULES – Employers can take advantage of the loosened classification rules that the Trump administration approved, which a federal judge ordered put into effect. These rules use a five-factor “economic reality” test that focuses on two factors.

Employers can simply ask themselves: 1) what level of control is asserted over the person performing the work; and 2) does the person performing the work have an opportunity to operate at a gain or a loss?

Under this test, the less control you have over when and how the person performs the work of a contracted job, the better. The more you allow the worker to acquire their own equipment and can perform other jobs/contracts, the more likely s/he is in business for themself.

Before the Trump DOL’s new rules, employers had to survive a fact-intensive evaluation if challenged on classifying a worker as an independent contractor. The prior rule weighed six factors, with no one factor more important than the others.

NEW PROPOSED RULE CHANGES – On October 11, the Biden DOL released proposed new rules. These revert to the pre-Trump rules and use a “totality of the circumstances” approach.

The Rules outline additional factors to consider in classification determination:

• Whether the contractor has a unique or qualifying skill set;
• Whether the contractor’s relationship with the organization using the services seems permanent or transient;
• Whether the contractor has invested in equipment and materials for the position; and
• Whether the work performed is an integral function of the organization’s business.

Comments on the proposed rules were taken from interested parties until December 13, 2022. Comments will be reviewed by the DOL months. Finalization, with any modifications, is expected to happen in Spring 2023.

WHAT SHOULD EMPLOYERS DO NOW – Bottom line: If DOL gives the final go-ahead, the old, complicated rules will become the new, complicated rules.

Employers should prepare to review their independent contractor contracts sometime in early to mid-2023 to ensure compliance.

How to prepare:

• Prepare a list of independent contractor agreements you currently have in place and review modification or termination terms. Look for clauses that allow modification or re-negotiation when regulations change. Also, be on the lookout for automatic renewal clauses and note the terms. These typically include a brief period of time before renewal to terminate or modify the agreement. You may want to halt automatic renewal at the first opportunity to facilitate changes if the regulation changes impact your relationship.
• Review the independent contractor’s actual work as it is currently performed. What counts for proper classification is what’s actually happening on the ground — not what the contract says should happen.
• Look for signs that supervisors are treating the worker like one of the employees. These include micro-managing the work performed, a specific schedule of work performance, detailed oversight of work, and control of work environment and performance. The more the worker looks like an employee, the more likely the relationship is an employee relationship that will fail the “totality of the circumstances” test.
• Using the “totality of the circumstances” approach, test each contract to see if each likely would still correctly classify the worker as an independent contractor. Be on the lookout for contract terms or work practices that do not allow the worker the ability to take on other clients/work that contributes to their financial well-being.
• If you believe a worker may be misclassified, , after following the above steps, work to rectify the concerns immediately. You must either change the work, performance requirements and environment that defines how the work is accomplished so that the contractor is in a contractual relationship to comply with the rules, OR you should change the position/person to an employee position. Legal counsel may be relied on for critical advice.
• Once DOL announces that it will put the rules in effect, an effective date will be established. For a significant change like this one, we should be able to expect 60-90 days between the announcement and the effective date. That should be enough time to ensure a compliant relationship/agreement.