The U.S. Department of Labor Introduces New Definition of Independent Contractors.

The U.S. Department of Labor Introduces New Definition of Independent Contractors.

Ellen O’Connell, Esq.
October 17, 2022

With inevitable regularity, when there is a change in the political party of the President of the U.S., then there will be an equal and opposite change to the interpretation of the independent contractor rule by the US Department of Labor.

The independent contractor rule determines who are employees, entitled to overtime when working more than 40 hours per week and typically qualify for paid time off and group benefits. Workers who are independent contractors receive neither overtime nor benefits eligibility.

When there is a Republican president the definition is broad, granting flexibility for contracting arrangements; when the president is a Democrat, the qualifications are narrow expanding the class of employees entitled to overtime and benefits. The first definition was provided by the U.S. Supreme Court in 1947 which said that whether or not a worker was an independent contractor depended on six factors:
1. The employer’s versus the individual’s degree of control over the work;
2. The individual’s opportunity for profit or loss;
3. The individual’s investment in facilities and equipment;
4. The permanency of the relationship between the parties;
5. The skill or expertise required by the individual; and
6. Whether the work is “part of an integrated unit of production.”

Shortly after the last election, the Biden administration attempted to cancel the implementation of the Trump-era regulation. However, the Biden DOL failed to follow the rules for changing administrative regulations and its attempt was voided in court, leaving the Trump rule in place.

The Trump-era DOL placed greater weight on the first two factors (control of the work; the person’s opportunity for profit or loss). If the facts showed that the individual had discretion over how the work was done, and that the person’s compensation showed an opportunity for profit or loss, then the person was an independent contractor. If those facts were ambiguous, then the analysis would continue and look at the skill or expertise required by the individual; the permanency of the relationship between the parties; and whether the work is “part of an integrated unit of production.”

On October 13, 2022, the DOL announced and sought comment on its new rule. If the new Biden rule is adopted, then, going forward workers will be considered independent contractors under a “economic realities” test consisting of six factors:
1. The opportunity for profit and loss depending on managerial skill;
2. Capital investment by the worker and employer;
3. The degree of permanence of the work relationship;
4. The nature and degree of control over the work;
5. The extent to which the work performed is an integral part of the employer’s business; and
6. The specialized skill in performing the work “in connection with business-like initiative that indicates that the worker is an independent contractor.”
The DOL administrator in charge of the proposed rule commented that all six factors are analyzed with a focus on whether workers are economically dependent on the employer for work or are in business for themselves. It is likely that the proposed rule will be adopted and will become effective in the next several months.

Employers must be aware that state wage and hour laws have different definitions for independent contractor status which also govern their employees. In New Jersey, a worker should be considered an employee unless all the following circumstances apply:

A. The individual has been and will continue to be free from control or direction over the performance of work performed, both under contract of service and in fact; and
B. The work is either outside the usual course of the business for which such service is performed, or the work is performed outside of all the places of business of the enterprise for which such service is performed; and
C. The individual is customarily engaged in an independently established trade, occupation, profession or business.
New Jersey’s governor empowered a Task Force on Misclassification to investigate and report on the independent contractor rule. Misclassification a topic that is in the forefront for investigation by both the U.S. and the New Jersey Departments of Labor investigations.

Elle is Of Counsel with the firm, he bio can be found by clicking here.