The U.S. Department of Labor (DOL) has issued a proposed rule that clarifies who is an employer or independent contractor under the Fair Labor Standards Act. The new rule could alter the landscape of the "gig economy."

Employees who are misclassified as independent contractors lose important federal labor protections including the right to minimum wage and overtime pay, protection from unlawful discrimination, and the right to take leave under Family Medical Leave Act to recover from an illness or care for a sick family member. 

How are the Regulations Changing?

The Wage and Hour Division of the DOL believes that the current rule, issued in 2021, regarding contractor classification does not align with the Fair Labor Standards Act (FLSA) or decades of case law related to the "economic realities" test. The 2021 independent contractor test makes it easier for a company to classify someone as a contractor. 

The new proposed DOL rule returns to a “totality-of-the-circumstances” measurement, which includes a six-factor economic realities test in which all factors are given the same level of consideration. The new list would look at the following:

-The worker’s opportunity for profit or loss
-Investments made by the worker and the company
-The work relationship’s level of permanence
-The worker’s nature and degree of control
-How integral the work being performed is to the business
-How much skill and initiative are necessary

What Does the New Rule Mean?

Because workers classified as independent contractors or gig workers are not included in FLSA requirements for overtime or minimum wage, reclassification will have a significant impact. It is anticipated that the new rule will lead to more workers being classified as employees rather than contractors. Contractors who are determined to be employees under the new rule could be entitled to additional pay and benefit standards, and would be entitled to minimum wage, overtime pay, and other benefits under the FLSA. 

The DOL’s proposed rule is intended to improve protections for workers who have been misclassified as contractors, provide consistency among businesses that use contractors, and eliminate unfair competition in commerce. The proposed rule could increase the tax burdens on employers due to an employer's responsibility for payroll taxes including social security. 

If you have questions about how this new rule may impact you or your employment situation, contact Orin Kurtz with Gardy & Notis’s Employment Division, or call us at 917-810-4303.