On October 13, 2022, the U.S. Department of Labor (DOL) proposed a new regulation (Independent Contractor [IC] Proposal) outlining how the agency, courts and employers should determine whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). Simultaneously, the IC Proposal rescinds the Trump-era 2021 regulation (Final Rule) that went into effect on March 8, 2021.
The FLSA imposes wage, hour and recordkeeping duties on employers with respect to its employees. Because independent contractors are not employees, the FLSA’s requirements do not apply to the work they complete. As such, the DOL must determine whether workers should be designated as independent contractors or employees. Through court precedent, the DOL has come to rely on an “economic realities” test to determine the existence of an employer-
employee relationship under the FLSA. Through regulation, the DOL has either expanded or narrowed its interpretation of the “economic realities” test, impacting the number of workers potentially covered by the FLSA.
For TCIA members and other tree care companies, the IC Proposal could have implications for their increasing reliance on contract climbers, which many companies turn to for complex and large jobs that require a contract-arborist’s reputation, skill and/or expertise. The use of a contract climber allows growing companies to scale their resources and meet client demands immediately while that company’s workforce expands. Additionally, contractors often possess specialized machinery, including cranes, that allow for the completion of specific and less common work. Given contractor specialization, knowledge and skill sets, they often provide valuable training to a firm’s employees through on-the-job exposure to advanced techniques. Because the IC Proposal would narrow who qualifies as an independent contractor under the FLSA, tree care companies utilizing contract climbers in their operations may face new challenges if the proposal takes effect.
Notable aspects of the IC Proposal
The IC Proposal clarifies that the ultimate inquiry when conducting the worker-classification analysis is the worker’s economic dependence – whether the worker is economically dependent on the employer for work (and is therefore an employee) or is in business for themself (and is an independent contractor). To determine the worker’s economic dependence, the DOL is proposing an expansive interpretation of the “economic realities” test. The DOL outlines six factors that will be used as tools or guides to conduct a “totality-of-the-circumstances” analysis of the relationship between the worker and the potential employer.
The six factors are:
- 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.
The totality-of-the-circumstances analysis means all six factors will be given equal weight in the worker-classification determination. This is a significant departure from the current standard, which highlights two “core factors” (factors 1 and 4 listed above) that are considered more indicative of the worker’s economic dependence on the potential employer.
The DOL states that these six factors were chosen based on circuit-court precedent and past National Labor Relations Board (NLRB) guidance (those issued prior to the Trump-era 2021 Final Rule). The agency also mentions additional factors may be relevant to determine the appropriate worker classification. But those factors can only be considered “if [they] in some way indicate whether the worker is in business for themselves, as opposed to being economically dependent on the employer for work.” The IC Proposal does not list what could be considered an additional factor in the analysis, however.
The DOL believes the rulemaking will help protect workers against misclassification and the resulting loss of benefits and protections provided under federal wage and hour laws. The DOL also claims the proposal will provide clarity to independent contractors and the employers who engage them. However, many potentially impacted employers and stakeholders do not view the DOL’s proposal in the same light.
In fact, they are concerned that the proposal does not provide clear rules for each factor and instead creates uncertainty around what would trigger independent contractor or employee status—potentially leading to increased litigation on the issue.
Furthermore, the DOL believes compliance costs will be less than $25 per establishment or independent contractor, and that individuals will only need between 15 and 30 minutes to read the regulation – a significant underestimation, according to many potentially impacted small businesses and independent contractors.
Background on the Trump Administration’s rule
On January 7, 2021, the Trump administration issued a rule that was intended to clarify some of the confusion around the “economic realities” test, such as the meaning of “economic dependence,” the standard’s lack of focus in the multifactor balancing test and confusion and inefficiency caused by overlap between the factors.
The interpretation of the “economic realities” test contained in the Final Rule consists of a five-factor test. It has two core factors of control and investment, with three additional factors (integration, skill and permanency) that are relevant only if those core factors are in disagreement. The agency argued that by providing clarity to the determination process, the Final Rule would bolster innovation in work arrangements and accommodate for the shifting landscape of the workplace provided by technology and other enhancements.
In May 2021, the Biden administration’s DOL attempted to delay and withdraw the Trump-era Final Rule. However, in March 2022, in response to a lawsuit challenging the DOL’s actions, a federal district court held that the DOL’s actions to postpone and withdraw the 2021 regulations were unlawful and vacated those actions, thereby reinstating the 2021 regulations.
As evidenced in the description above, the new IC Proposal seeks to properly withdraw the Trump-era Final Rule and return to an expansive interpretation of the “economic realities” test that does not provide the kind of “bright-line test,” or clarity, companies and workers need to ensure compliance and avoid unnecessary litigation. The result, were the DOL to adopt a final rule similar to the IC Proposal, would be the introduction of additional confusion that will require TCIA members to evaluate their relationships with contract climbers to ensure they are classified appropriately. The DOL is accepting comments from the regulated community on its proposal through December 13, 2022.
Josh Leonard is a legislative assistant with Ulman Public Policy, TCIA’s Washington, D.C.-based advocacy and lobbying partner. Want to know more about TCIA’s advocacy efforts? Click here.