This week, the U.S. Department of Labor (DOL) proposed a new rule that would create a uniform approach to the way companies classify workers as independent contractors or employees under the Fair Labor Standards Act (FLSA). The notion of classifying workers as independent contractors versus employees has continued to gain importance in recent years, given the growing gig economy, which makes independent contractors central to the business models of many major companies.

The DOL’s newly proposed rule would greatly benefit companies, by making it easier to classify workers as independent contractors and thereby remove a company’s obligation to provide typical employee benefits and workplace protections, such as paid leave, overtime pay and other fringe benefits. This marks a large shift from the standard proposed under the Obama administration, which would have broadened the scope of employee status, but was ultimately nixed by the Trump administration in 2017.

In its 159-page proposal, the DOL adopts what is known as the “economic reality test” to distinguish between employees and independent contractors. By way of background, the economic reality test uses five main factors to determine whether workers are in business for themselves (an independent contractor), or whether they are economically dependent on a potential employer for work (an employee). This test has, as noted by the DOL, often been used by courts around the country to make this very determination.

However, the DOL, in an attempt to “fine-tune” this inquiry, notably veered away from the classic application of the economic reality test by the courts. Namely, rather than giving all five factors equal weight (as is typically done), the proposed rule suggests that two of the factors – the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss – should be considered as more probative of a worker’s economic independence, and therefore afforded greater importance in this analysis.

Importantly, the proposed rule contains a section devoted to explaining away the DOL’s decision not to use the alternative “ABC Test,” which was recently adopted and codified in California.  Specifically, the DOL reasoned that the ABC test is, on its face, more restrictive than its counterpart and would likely result in the large-scale (and costly) reclassification of many independent contractors to employees and a loss of flexible working arrangements. In addition, the DOL stated that it is legally restrained from adopting the ABC test, given that the U.S. Supreme Court has instituted the economic reality test as the relevant standard.

The DOL, seemingly realizing the political importance of this proposal, has placed it on the fast-track to finalization. The agency intends to formally publish the rule this week or next, after which there will only be a 30-day comment period, which is markedly shorter than the usual 60- or 90-day period typically given for the public to weigh in on a proposed rule of this significance.

The DOL’s proposed rule, once finalized, will have important consequences for employers when classifying their workers under FLSA.  If you have any questions or concerns about the new rule, or how it affects your company, Reed Smith’s experienced Labor & Employment Group is ready to speak with you. For more information regarding this decision or the joint employment doctrine, please contact your Reed Smith attorney.