The U.S. Department of Labor recently published a proposed rule updating the test for determining whether a worker is an employee under the Fair Labor Standards Act (FLSA) or an independent contractor. NAHB last week submitted formal comments opposing the proposed rule, which is intended to combat employee misclassification, and would alter the test for independent contractor status under the FLSA as last articulated by the prior Administration.
The executive summary of the proposed rule notes: “[Workers who] are in business for themselves ... play an important role in the economy and are commonly referred to by different names, including independent contractor, self-employed and freelancer. This proposed Rulemaking is not intended to disrupt the businesses of independent contractors who are, as a matter of economic reality, in business for themselves.”
However, NAHB, and many other groups, argue that the language of the new test introduces new, undefined, vague terminology, and would reclassify legitimate independent contractors – including those with their own businesses – into employees, and threatens to impact many industries that rely on the subcontractor business model, including residential construction.
The proposed rule attempts restore a “totality-of-the circumstances” analysis, setting forth six non-weighted factors to consider when determining whether a worker is an employee or an independent contractor. The test’s ultimate inquiry is whether, as a matter of economic reality, the worker is economically dependent on the employer (and thus an employee), or in business for themselves (and thus an independent contractor).
The six factors include:
- Is the work performed an integral part of the employer’s business?
- Does the worker’s managerial skill affect the worker’s opportunity for profit or less?
- Is the relationship between the worker and employer permanent or indefinite?
- What is the nature and degree of the employer’s control?
- Does the worker use specialized skills to perform the work, and do those skills contribute to business-like initiative?
- Are investments by a worker capital or entrepreneurial in nature?
The independent contractor rule that went into effect in early 2021, which NAHB supported, provided much needed clarity, uniformity, and simplicity to the independent contractor analysis and accounts for the realities of the modern workplace.
NAHB and more than 200 business groups, including the Associated Builders and Contractors and Associated General Contractors of America and many state and local Chambers of Commerce, call on the Labor Department to withdraw the proposal.
“Not only does the Proposed Rule ignore the realities of how businesses and independent contractors work together in 21st century America, but in so doing, it ignores the preference many workers have to remain independent contractors,” the groups state in the comment letter.
NAHB has been engaged in the rulemaking process from the beginning and will continue to monitor and provide updates as the rule moves forward. Importantly, this proposed test will not impact tests by the IRS or other federal agencies.