DOL Proposes Rescinding 2024 IC Rule
The U.S. Department of Labor (DOL) has issued a notice of proposed rulemaking (NPRM) that aims to rescind its 2024 final rule, which includes criteria for determining whether a worker is an employee or an independent contractor (IC) under the Fair Labor Standards Act (FLSA). According to the DOL, the proposal would remove the analysis currently contained in 29 CFR part 795 and replace it with the analysis the DOL published and adopted in a prior final rule (dated January 7, 2021), with a few modifications.
“Specifically, the Department is proposing to rescind a 2024 rule on that topic which it is no longer applying in its investigations and replace it with a streamlined analysis, backed by federal judicial precedent, that will provide greater clarity and predictability to workers and employers alike as to their proper classification. The Department also proposes to apply this analysis to the Family and Medical Leave Act (FMLA) and Migrant and Seasonal Agricultural Worker Protection Act (MSPA), both of which incorporate the FLSA’s relevant definitions.
In particular, the NPRM’s proposed analysis would:
- Adopt an “economic reality” test to determine a worker’s status as an employee or independent contractor, examining whether a worker is in business for him- or herself (independent contractor) or is economically dependent on a potential employer for work (employee);
- Identify and explain two “core factors”—(1) the nature and degree of the worker’s control over the work; and (2) the worker’s opportunity for profit or loss based on initiative and/or investment—that federal courts primarily consider to answer the question of whether a worker is economically dependent on someone else’s business or is in business for him- or herself;
- Identify three other factors relevant to the analysis, particularly when the two core factors do not point to the same classification: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the worker and the potential employer; and (3) whether the work is part of an integrated unit of production; and also note that additional factors may be considered in the analysis;
- Advise that the parties’ actual practices are more relevant than what may be contractually or theoretically possible; and
- Provide eight examples of how the economic reality factors would apply in certain real life situations.”
Key Takeaways for Employers
- This is currently a proposal, not a final change. The DOL is proposing to rescind the 2024 rule and replace it; employers should treat the NPRM as the start of the rulemaking process rather than an immediate change.
- Review the DOL’s Q&As explaining the NPRM and understand their enforcement priorities.
- Consider whether to submit comments. The DOL encourages interested parties to provide feedback during the comment period.
- Plan for potential shifts in the federal classification framework. If finalized, the rule would return to the January 7, 2021, analysis, with modifications. Employers that rely on independent contractors will want to monitor the proposal closely.
Employers are also reminded that the DOL’s IC rule is not the only IC rule. At the federal level, the Internal Revenue Service (IRS) has separate definitions and requirements. Local laws may also apply, creating additional considerations and requirements. For example, in Wisconsin, there are workers’ compensation, unemployment insurance, and Wisconsin Fair Employment Act tests. Additional state laws also define who is an employee, including Chapter 103 Employment Regulations Wis. Stat. § 103.001(5) and Chapter 104 Minimum Wage Law Wis. Stat. § 104.01(2)(a).
If you have questions on this topic, contact us. MRA members can reach out to our 24/7 HR Hotline.
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