What You Need to Know About the DOL Contractor Rule

The U.S. Department of Labor’s proposed contractor rule changes how businesses classify contractors

On 13 October 2022, the U.S. Department of Labor (DOL) issued a notice that proposed changes to how workers are classified as either employees or independent contractors. The rule is designed to decrease the chance that employees will be wrongly considered independent contractors. The DOL has stated that the new rule would preserve essential worker’s rights and provide consistency for entities that are regulated.

The DOL has been focusing on protecting "low-wage vulnerable workers" from being misclassified as independent contractors in industries such as construction, health care, trucking, retail, and food service. The new rule would return the standard to a six-factor "totality of the circumstances" framework. This reverses a Trump administration rule that gave extra weight to two specific factors.

Changes in policy may result in negative impacts for a variety of industries, including retail and manufacturing. The gig economy, which relies heavily on independent contractors, has been the sector that's received the most focus amid these changes.

Limiting independent contracting would have an especially large effect on trucking companies. The trucking industry employs contractors who own their trucks in order to meet the varying demands of customers and avoid the costs associated with maintaining fleets of vehicles. If trucking companies increase prices or reduce services, it could intensify the pressure on supply chains that have already been weakened by the COVID-19 pandemic.

If independent contracting is limited, some companies might reduce their numbers of workers or eliminate certain positions entirely. This could result in more expensive moves and longer wait times for household goods.

Bobby Bartle, general counsel at Aires, explained, “First, as with many industries, it could very well have a direct impact on supplier costs that will be passed back to the company and could compromise high-touch customer service offerings from industries that typically rely on independent contractors, thus making the ease and cost-effectiveness of mobility more burdensome to mobility’s internal customers.”

Bartle added, “Additionally, it will have practical downstream impacts within the sphere of mobility’s growing influence, such as immigration and location-based compliance obligations of a larger and more fluid population of employees. As the lines blur between mobility and compliance, these burdens of maintaining compliance will likely continue to knock on the door of the mobility department for governance and legislation such as the proposed DOL independent contractor rule will escalate that process.”

Why the DOL Proposed a New Rule

Independent contractors technically run their own businesses. Companies that frequently employ independent contractors often argue that the freedom to set their own hours and manage themselves is more advantageous. But opponents say that companies wrongfully classify workers as independent contractors when they are truly employees. Generally, employees receive more benefits than contractors.

The DOL’s test to determine a person's employment status remained unchanged for decades. The DOL created a “multifactor economic reality test” to help them determine if someone was an independent contractor or employee under the Fair Labor Standards Act (FLSA). The intent of this test was to determine how enduring the contractor-principal relationship is, if the services provided are crucial to the principal's business model, and, finally, how much authority over said work the principal has.

The DOL has found that a number of companies have been incorrectly labeling employees as contractors, which led to the workers not receiving proper compensation. In one case, the department identified almost $180,000 in recovered back wages.

The DOL and others believe that misclassification is a significant problem. Cynthia Estlund, a law professor at New York University specializing in labor and employment, told Poynter that misclassification is “made worse by the fact that the tests are so mushy—lots of multifactor balancing. There are some cases in which it’s genuinely difficult to figure out and employers can manipulate the tests because some of the factors are in the control of the employer.”

This concern has led to the newly proposed DOL independent contractor rule.

The Basics of the DOL Contractor Rule

The rule, if passed, will add fuel to the already hot debate about whether freelancers and independent contractors should be treated differently. In 2019, the California Legislature passed AB5, which built upon the existing “ABC” test to determine whether a worker is an independent contractor. The test states that anyone working for a company is an employee unless they meet these three requirements:

• They have the freedom to work without being controlled or directed by the entity who hired them.
• They provide services that fall outside of the scope of work for the organization that hired them.
• They are customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

After some deliberation, certain aspects of AB5 were changed, including adding an amendment with various exceptions for different industries. Proposition 22 classified Uber and Lyft drivers as independent contractors, although it was later struck down by a Superior Court judge.

However, the Protecting the Right to Organize Act (also known as the PRO Act) last year gave AB5 more traction. The PRO Act would have instituted the ABC test on a federal level through the National Labor Relations Act. The policy was passed in the House but was unsuccessful in moving any further.

The DOL's newly proposed rule will make it harder for businesses to classify workers as independent contractors, as compared to the current rule. The DOL kept the general "economic realities" test in its proposed rule, though the framework has changed. Rather than two weighted "core factors," the new rule will use a six-factor "totality of the circumstances" test.

To start, the DOL proposed rule would repeal the 2021 Independent Contractor Rule, which some believed made it easier for workers to be classified as independent contractors. It would mark a return to the original, long-term interpretation of the economic reality factors so that the DOL's approach matches the courts' FLSA interpretation and the economic reality test.

The new rule will analyze all economic realities and test factors equally, without giving any one factor more weight than another. To determine whether a worker is an employee or independent contractor under the FLSA, the new rule will consider all of the relevant factors, not just one or two. Finally, the new rule will help ensure that employees and independent contractors are properly classified under the FLSA.

Ultimately, the DOL's proposed rule is created to show whether workers are “economically dependent” on their employer or if they conduct business for themselves. Here is how the proposed test will work:

The Six-Factor Test

The six-factor test would assess the “totality of the circumstances” to determine whether a worker is an independent contractor or employee under the FLSA. The six factors are:

1. Does the worker have the potential to make a profit or suffer a loss depending on the managerial skill?
2. What are the investments by the worker and the employer?
3. What is the degree of permanence of the working relationship?
4. What is the nature and degree of control for the worker? For example, do they schedule, supervise, set prices, and have the ability to work for others?
5. To what extent is the work performed a necessary part of the employer’s business?
6. Is specialized skill and initiative required of the worker?

The DOL states that, under this proposed rule, the analysis should be constantly changing in order to assess the reality of the relationship as a whole rather than relying on any one factor.

Contractors and Companies Express Concern

Individuals working as independent contractors as well as companies that employ contractors have voiced mixed opinions in comments to the DOL.

Even workers that might be considered to be disadvantaged by the gig economy—like Uber drivers—don't always see themselves as being classified incorrectly. A majority of Uber drivers, according to both Uber's own surveys and independent researchers' polls, wanted to be considered independent contractors rather than employees. The surveyed driver said they liked the flexibility to choose when they clock in and out.

Companies like Lyft, Uber, Instacart, and DoorDash rely on contract workers who can pick up shifts at their own convenience. The companies state that independent contractor status makes possible flexible schedules, which are attractive to workers. Though the new proposal would change how rideshare companies operate, they have said it wouldn't upend their business models.

Uber’s head of federal affairs, CR Wooters, said in a statement that the proposed rule “takes a measured approach, essentially returning us to the Obama era, during which our industry grew exponentially. In a time of deep economic uncertainty, it’s 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.”

“Yes, those Uber and Lyft drivers need worker protections,” wrote Michelle Liggitt, a self-described freelancer, in a comment to the DOL. “But this rule is overly broad and would have enormous negative impacts far outweighing the help it might give to that small subset of gig workers.”

Other companies that rely heavily on independent contractors—such as trucking companies—have expressed concern about the new rule.

The American Translators Association (ATA) said in a statement that it “is concerned about the DOL’s rigid, one-size-fits-all approach to worker classification, which ignores what happened in California with AB5 and discounts the concerns of tens of thousands of professional freelancers and the dozens of language professionals who spoke up during DOL listening sessions on the development of this rule in June of this year.”

Matt Schrap, CEO of the Harbor Trucking Association, said that trucking industry professionals are awaiting clarification on how the DOL’s proposal will affect owner-operators.

“We need some level of certainty,” he said. “That’s the main thing. ... It’s becoming increasingly difficult for independent contractors in trucking to remain as such. It’s unfortunate because it’s taking away these entrepreneurial opportunities for people.”

The comment period for this notice closes at 11:59 p.m. ET on 13 December 2022. Anyone submitting a comment should be aware that, by doing so, they are making the comment and any personal information included public record. The comment will be posted without change to www.regulations.gov.