DOL’s Proposed Rule Could Make It Harder to Classify Workers as Independent Contractors
Workspan Daily
October 12, 2022
Key Takeaways

  • A new independent contractor rule. The Biden administration released a proposed rule that would return the DOL’s independent contractor classification standard to a multi-factor “totality-of-the-circumstances" analysis framework.  
  • Multifactor reality test. The proposed rule would put into place a multifactor reality test to determine whether workers are truly in business for themselves and control aspects of their employment. 
  • Legal challenges likely. As they did upon the passing of California’s AB-5 legislation that similarly required app-based, ride-share and food-delivery service companies to classify their drivers as employees, Uber, Lyft, DoorDash and others are likely to challenge the DOL’s proposed rule. 

The U.S. Department of Labor (DOL) is proposing a new rule that will make it harder for organizations to classify workers as independent contractors under the Fair Labor Standards Act (FLSA).  

The proposed regulations, which were released on Tuesday, would affect millions of workers across a range of industries, including healthcare, restaurants, construction and ride-share transportation, the DOL said.  

The Biden administration rule, like California’s AB-5 legislation, takes aim at ride-share and food-delivery companies such as Uber, Lyft and DoorDash, which have a majority of workers classified as independent contractors.  

The proposal would return the DOL’s independent contractor classification standard to a multi-factor “totality-of-the-circumstances analysis” framework and rescind the Trump administration’s regulation, which clarified and simplified the multi-factor test and stressed that two “core” factors — a worker’s control over their work, and their opportunity for profit or loss — were paramount in making an independent contractor determination. 

“We have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation’s most vulnerable workers,” Labor Secretary Marty Walsh said in a statement. “Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages.” 

Under FLSA, employees are eligible for protections such as the minimum wage or overtime pay that don’t apply to independent contractors. 

Rule Breakdown  

The Biden administration was quick to delay the prior administration’s interpretation of the independent contractor rule before ultimately withdrawing it in May 2021.  

However, a federal district court put the Trump-era rule into effect in March, holding that the Biden administration acted improperly under federal law when it rescinded the rule. Thus, the DOL proceeded with constructing a new rule to replace it.  

DOL Wage and Hour Division administrator Jessica Looman told reporters on a press call on Tuesday that the rulemaking wasn’t likely to result in large worker classification changes.  

“What we anticipate is that this will really help provide guidance to both avoid and prevent misclassification,” Looman said. “But this is a framework that has been used and has been well recognized and understood.” 

The proposed rule would put into place a “multifactor reality test” to determine whether workers are truly in business for themselves and control aspects of their employment. Per the proposed rule, the six non-exhaustive factors DOL would consider in the assessment of the economic realities of a working relationship include: 

  • Opportunity for profit or loss depending on managerial skill 
  • Investments by the worker and the employer 
  • Degree of permanence of the work relationship 
  • Nature and degree of control 
  • Extent to which the work performed is an integral part of the employer’s business 
  • Skill and initiative 

“Absent a change in the law, the department will continue to adhere to the economic reality test which is supported by decades of judicial decisions,” Looman said. 

The proposed regulation will be published in the Federal Register on Oct. 13 and the public will have 45 days to comment. It’s expected that the rule wouldn’t go into effect until 2023.  

Legal Challenges  

As they did upon the passing of California’s AB-5 legislation that similarly required ride-share and food-delivery service companies to classify their drivers as employees, Uber, Lyft, DoorDash and others are likely to challenge the DOL’s proposed rule.  

The companies were able to stave off California’s legislation with a ballot initiative in the November 2020 election called Proposition 22, which passed with 59% of the vote and granted app-based transportation and delivery companies an exception to the AB-5 law, allowing them to still classify drivers as independent contractors.  

“There’s going to be a contentious fight over this in the courts and if there is a change in political power at the federal level there’s going to be a continuation of this ongoing instability,” Peter Norlander, a professor at Loyola University Chicago who studies gig work, told the Wall Street Journal.  

Uber responded to the DOL’s proposed rule on Tuesday, emphasizing that its drivers overwhelmingly prefer the flexibility that accompanies being an independent contractor.  

“In a time of deep economic uncertainty, it is crucial that the Biden administration continues to hear from the more than 50 million people who have found an earning opportunity with companies like ours,” said Uber’s head of federal affairs CR Wooters.  

In a statement, DoorDash said that it didn’t anticipate the rule causing changes to its business model or to its workers’ status as independent contractors.  

Veena Dubal, a professor at the University of California Hastings College of Law, told the Wall Street Journal that the Biden administration’s rule isn’t stringent enough and provides app-based companies “a lot of wiggle room” and remains skeptical that these larger companies will change their business model as a result.  

“They could take this all the way up to the Supreme Court,” she said. “They would really play hardball in that regard.” 

Similar to the AB-5 law in California, the rule would have a greater impact on smaller businesses such as construction companies or nail salons, Dubal added “because they cannot withstand that kind of scrutiny and the financial risks and legal costs. 

Editor’s Note: Additional Content 

For more information and resources related to this article see the pages below, which offer quick access to all WorldatWork content on these topics: 

Related WorldatWork Resources
Survey Shows Uptick in Employee Sentiment Toward Employer-Provided Healthcare
Increase Engagement in Diabetes Programs With Behavioral Economics   
Congress Passes Law Limiting Non-Disclosure Use for Workplace Sexual Misconduct
Related WorldatWork Courses
Understanding Pay Equity
Quantitative Principles in Compensation Management
Geographic Pay Strategies