By Heather Fithian Romansky
I. Introduction
On October 11, 2022, the Wage and Hour Division of the Department of Labor announced a proposed rule aimed at repealing the lame-duck policy instituted in January 2021, which made it easier for employers to classify workers as independent contractors rather than employees.[1]
In the 1940s, the Supreme Court’s decision in United States v. Silk laid out the first version of the economic reality test,[2] which contained five factors: (1) degrees of control; (2) opportunities for profit or loss; (3) investment in facilities; (4) permanency of relation; and (5) skill required in the claimed independent operation.[3] This version of the test used a totality of the circumstances analysis to determine if an employer-employee relationship existed.[4] The Court cautioned that no single factor was controlling, the list was not exhaustive, and the existence of a written contract was not a final determination of the actual reality of the situation.[5]
Before the 2021 lame-duck amendment, the Department of Labor used a six-factor economic reality test outlined in a 2019 Wage and Hour Division letter issued in response to a request from “a virtual marketplace company.”[6] The six factors varied slightly from those previously articulated by the Department and were “derived from Supreme Court precedent.”[7] The factors included: “(1) the nature and degree of the employer’s control; (2) the permanency of the worker’s relationship with the employer; (3) the amount of the worker’s investment in facilities, equipment, or helpers; (4) the amount of skill, initiative, judgment, and foresight required for the worker’s services; (5) the worker’s opportunities for profit or loss; and (6) the extent of the integration of the worker’s services into the employer’s business.”[8]
In the 2019 letter, the Wage and Hour Division, using the six-factor economic reality test outlined above, concluded that “workers who provide services to consumers through this specific company’s virtual platform are independent contractors, not employees of the company.”[9] The Department of Labor repealed these factors on February 19, 2021.[10]
The 2021 lame-duck policy created a “streamlined” economic reality test focusing on two core factors: (1) the nature and degree of control over the work; and (2) worker’s opportunity for profit or loss based on initiative and/or investment.[11] Contrary to the prior analysis, where no factor was to be considered dispositive or given greater weight than the others, these factors were given greater weight in determining a worker’s classification.[12] The remaining traditional factors could only be considered if the two core factors pointed to different classifications.[13] The remaining traditional factors could only be considered if the two core factors pointed to different classifications.[14] Applying the streamlined test reduced the number of workers classified as employees.[15] It effectively limited the number of workers subject to minimum wage, overtime pay, and recordkeeping requirements under federal law.[16]
Despite the simplified approach, there was a myriad of confusion surrounding the lame-duck rule and the Department of Labor’s repeal thereof in May 2021. In March 2022, the Coalition for Workforce Innovation, which represents gig-economy companies like Uber and Lyft, won a challenge to the Biden administration’s repeal of the 2021 lame-duck rule in the Eastern District of Texas.[17] Judge Marcia A. Crone held that the withdrawal was unlawful and restored the 2021 lame-duck rule.[18]
II. The Proposed Rule
In response to the March 2022 restoration of the 2021 lame-duck rule, the Department of Labor announced the proposed rule in October 2022. The Department of Labor purported several goals for the proposed rule: bring the economic reality test back to the 2020 interpretation—with a few additions—and “assist with the proper classification of employees and independent contractors under the F[air] L[abor] S[tandards] A[ct],” essentially adding clarity to misclassifications.[19] Additionally, the Department stated the proposed rule would officially rescind the 2021 Independent Contractor Rule.[20] The Department of Labor initially intended to accept public comments through November 28, 2022; however, after receiving pushback for the narrow time frame, the Department extended the deadline for comments to December 13, 2022.[21] By the close of the public comment period, the Department received over 55,000 comments.[22] As of February 2022, there has yet to be any further action on the proposed rule, likely due to the overwhelming number of public comments received.[23]
In addition to gig-economy companies, several other industries—such as tech, construction, and trucking—could be impacted by the proposed rule.[24] Returning to the previous interpretation of the economic reality test carries potentially high economic costs for gig-economy companies that consider their workers independent contractors. Unlike independent contractor arrangements, employees are subject to minimum wage, overtime pay, and recordkeeping requirements under federal law.[25]
Employers receive additional cost-saving benefits in independent contractor arrangements. They are not required to provide health care benefits or pay premiums for workers’ compensation or disability insurance.[26] Employers are not responsible for paying taxes related to state and federal employment tax or Social Security.[27] Instead, the independent contractor is responsible for obtaining insurance and paying the above taxes.[28] In 2022, the Bureau of Labor Statistics estimated that “total employer compensation costs for civilian workers averaged $41.86 per hour worked.”[29] Of this $41.86, $28.88, or sixty-nine percent, was allocated to wages and salaries.[30] Benefits[31] contributed the remaining $12.98, accounting for thirty-one percent of the hourly total.[32]
III. Conclusion
If the proposed rule takes effect, gig-economy companies have several options. First, they can work to ensure that if challenged, their workers would likely qualify as independent contractors under the economic reality test contained within the proposed rule. Alternatively, gig-economy companies could decide they are tired of the constantly changing interpretation of who qualifies as an independent contractor and offer full-time or part-time employee positions. Though, this is a less cost-effective solution.
The verdict is still out on the proposed rule; whether the economic reality test will essentially return to the 2020 interpretation is yet to be seen. While the proposed rule’s language could spell trouble when misclassification occurs, the courts will continue to be the ultimate arbiters of a worker’s status as an employee or independent contractor.
About the Author:
Heather is a second-year regular division student expected to graduate in May 2024 and the incoming Internal Managing Editor for Volume 49 of the Journal. Additionally, she is the secretary and president-elect of the First Generation Law Student Association, an Academic Success Fellow, and a Research Assistant to Distinguished Professor Alan E. Garfield. Heather is a proud alumna of the University of Minnesota and Rowan College of South Jersey. Prior to law school, Heather spent nearly five years working as a personal injury paralegal for various firms in the Philadelphia area. In her spare time, she enjoys baking, hanging out with her rescue pup, Holly, traveling the continental U.S., and game nights with her family. After graduation, Heather intends to practice in Delaware and will begin her career as a clerk to the Honorable Master in Chancery Bonnie W. David of the Delaware Court of Chancery for the 2024–25 term.
[1] See Kathleen Dailey, Business Groups Get Trump Independent Contractor Rule Reinstated, Bloomberg, (Mar. 15, 2022, 3:31 PM), https://news.bloomberglaw.com/litigation/business-groups-get-trump-independent-contractor-rule-reinstated.
[2] Courts have traditionally used this test to determine whether a worker is an independent contractor or an employee.
[3] See United States v. Silk, 331 U.S. 704, 712-14 (1947).
[4] See Wage and Hour Div. of the U.S. Dep’t of Labor, Proposed Rule on Employee or Independent Contractor Classification Under the Fair Labor Standards Act (Oct. 13, 2022), https://www.regulations.gov/document/WHD-2022-0003-0001.
[5] See Allan Bloom, DOL’s New Independent Contractor Rule: A Return to 2020, Proskauer Law and the Workplace Blog (Oct. 31,2022), https://www.lawandtheworkplace.com/2022/10/dols-new-independent-contractor-rule-a-return-to-2020/#:~:text=In%20March%202021%2C%20the%20Biden,was%20unlawful%2C%20and%20restored%20it; see also Wage and Hour Div., supra note 4.
[6] See Press Release, U.S. Dep’t of Labor, Wage and Hour Div., US Department of Labor Announces Proposed Rule on Classifying Employees, Independent Contractors; Seeks to Return to Longstanding Interpretation (Oct. 11, 2022) (on file with author).
[7] See id.
[8] See id.
[9] See id.
[10] See Jordan Call, Department of Labor Withdraws Gig Economy Opinion Letter that Supported Independent Contractor Classification, https://www.jdsupra.com/legalnews/department-of-labor-withdraws-gig-2161674/
[11] See Bloom, supra note 5.
[12] See Bloom, supra note 5; see also Wage and Hour Div., supra note 4.
[13] See Bloom, supra note 5.
[14] See Bloom, supra note 5.
[15] See generally Wage and Hour Div., supra note 4.
[16] See generally Wage and Hour Div., supra note 4.
[17] See Dailey, supra note 1.
[18] See Bloom, supra note 5; see also Dailey, supra note 1.
[19] See Wage and Hour Div., supra note 4; see also U.S. Dep’t of Labor, supra note 6.
[20] See U.S. Dep’t of Labor, supra note 6.
[21] See Rebecca Rainey, DOL Extends Contractor Proposal Comment Period After Complaints, Bloomberg, (Oct. 25, 2022, 8:56 AM), https://news.bloomberglaw.com/daily-labor-report/dol-extends-contractor-proposal-comment-period-after-complaints.
[22] See Wage and Hour Div., supra note 4.
[23] See Wage and Hour Div., supra note 4.
[24] See Rainey, supra note 21.
[25] See generally Wage and Hour Div., supra note 4.
[26] See What’s the Difference Between an Independent Contractor vs. an Employee?, Gusto Blog Hiring and Growth (Nov. 12, 2020), https://gusto.com/blog/hiring/independent-contractor-vs-employee.
[27] See id.
[28] See id.
[29] See Press Release, Bureau of Labor Statistics, Employer Costs for Employee Compensation – September 2022 (Dec. 15, 2022) (on file with author).
[30] See id.
[31] Benefits include paid leave, supplemental pay (overtime and premium, shift differentials, and nonproduction bonuses), various types of insurance, retirement and savings, and legally required benefits. See id.
[32] See id.