The Department of Labor (DOL) has proposed a new rule regarding the classification of workers as independent contractors or employees under the Fair Labor Standards Act (FLSA). This proposed rule, once finalized, will replace the Trump Administration’s rule and return to the approach used during the Obama Administration. While the final impact of the new rule remains to be seen, businesses should be proactive in anticipating increased litigation risks and ensuring compliance with federal and state laws.

When conducting a routine check of the rule’s status on regulations.gov, we spotted a new placeholder entry that suggests this rule could go into effect sometime this month.

Before the final rule goes into effect, it could be crucial to your business to implement preventive law tools to help you navigate these changes and minimize your exposure to independent contractor misclassification liability.

What Has Changed with the Independent Contractor Rule?

The Biden 2022 Rule, similar to the Trump 2021 Rule, begins with a summary of court decisions related to the FLSA. But the two rules interpret these cases from contrasting viewpoints. The Trump Rule essentially functioned as a legal argument in favor of businesses advocating for independent contractor status by focusing on a “totality-of-the-circumstances” analysis rather than emphasizing “core” and “non-core” factors. The Biden 2022 Rule takes on a tone that supports employee advocates, placing greater weight on factors such as the worker’s opportunity for profit or loss, the work’s integral role in the employer’s business, and the degree of control the employer has over the worker.

The new proposed regulation outlines six primary factors to be considered when determining the “economic reality” of the parties’ relationship, which has been the focus of the courts for decades:

  1. Opportunity for profit or loss based on managerial skill.
  2. Investments made by the worker and the alleged employer.
  3. The degree of permanence in the work relationship.
  4. The nature and extent of control over the work performance and the economic aspects of the working relationship.
  5. The extent to which the work is an integral part of the alleged employer’s business.
  6. The worker’s skill and initiative.

Following each of the six factors in the proposed regulation is a brief explanation of how the Labor Department believes courts should apply each factor. This is where the new regulation diverges from the Trump 2021 Rule, as the descriptions lean more towards employee status. Nonetheless, the six factors themselves align with those cited by numerous courts as crucial for determining independent contractor status based on the economic realities of the parties involved.

Additionally, the Biden 2022 Rule introduces a seventh factor: “Additional Factors,” which encompasses any factors that may indicate whether the worker is operating their own business or is economically dependent on the employer for work.

How Does The Independent Contractor Rule Change Affect Your Business?

Although the courts have the final say on worker classifications, the proposed rule may create anxiety among businesses and workers who receive 1099s. Some workers may file class action lawsuits seeking minimum wage or overtime payments under federal and state laws. To minimize these risks, businesses should ensure compliance with applicable laws and consider implementing arbitration agreements with class and collective action waivers.

How Can Forward Law Firm Help?

At Forward Law Firm, we specialize in helping businesses minimize their exposure to independent contractor misclassification liability. We recommend a two-step approach:

Enhance compliance with federal and state laws: 

Work with us to better ensure your independent contractor relationships are designed, documented, and executed to be consistent with the law. Avoid panacea solutions. These tend to do more harm than good, sometimes creating evidence that ends up proving rather than precluding misclassification. We can create customized documents designed to help bolster your company’s independent contractor relations and minimize its misclassification liability.

Implement effective arbitration agreements: 

Draft or update arbitration agreements in your independent contractor agreements. By including thoughtful arbitration provisions that include class and collective action waivers, we can help you reduce the likelihood of class actions arising from independent contractor disputes.

Takeaway

As the Department of Labor’s new proposed rule on independent contractor classification is nearing finalization, businesses should be proactive in ensuring compliance with federal and state laws. Forward Law Firm offers preventive law services to help you navigate these changes and minimize your exposure to independent contractor misclassification liability. Contact us today to discuss how we can help your business stay compliant and minimize risks associated with worker misclassifications.

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