The U.S. Department of Labor has announced a proposed rule addressing when a worker may be classified as an employee or an independent contractor under Federal laws such as the Fair Labor Standards Act, Family Medical Leave Act and Migrant and Seasonal Agricultural Worker Protection Act. The Department’s proposed rule will rescind the 2024 final rule on the same topic.

To determine whether a worker is an employee or an independent contractor, the proposed rule lays out an economic realities test, which focuses on whether a worker is economically dependent on an employer for work, as an employee, or is in business for themselves, as an independent contractor. The proposed rule identifies two core factors to help determine if a worker is economically dependent on an employer for work: (1) the nature and degree of control over the work; and (2) the worker’s opportunity for profit or loss based on initiative and/or investment.

The more control the worker exercises over the work, the more this factor weighs towards the individual being an independent contractor. In contrast, if an employer exercises substantial control over the worker’s schedule and projects,this factor weighs in favor of the individual being an employee.

If a worker is able to exercise initiative and manage investment in equipment or materials, this factor weighs in favor of the worker being an independent contractor. On the other hand, if the worker is unable to affect his or her earnings or is only able to do so by working more hours, this factor weighs towards the individual being an employee.

The analysis in the proposed rule includes additional factors to evaluate a worker’s status as an employee or independent contractor, including the skill required for the work, the degree of permanence of the working relationship, and whether the work is part of an integrated unit of production. The proposed rule also includes eight real-world examples applying the factors to factual situations.

The Department’s goal in the proposed rule is to create a predictable classification of workers and lessen restrictions on independent contractor arrangements. If you have questions about independent contractor classification, reach out to an RKW attorney to learn more.