On October 13, 2022, a new proposed rule promulgated by the U.S. Department of Labor (the “DOL”) in connection with the classification of employees and independent contractors will be published in the Federal Register and on the U.S. Government’s Information site.

Existing Rule: “Economic Reality Factors” Determine Classification

The new proposed rule would replace the DOL’s current 2021 Rule (a/k/a the “Trump Rule”) regarding classification. The 2021 Rule identifies five “economic reality factors” to be applied in determining whether a worker was an employee or independent contractor under the Fair Labor Standards Act (the “FLSA”).  These five factors include two “core” factors that were to be weighed more heavily in the analysis.  If these two “core” factors—(1) the nature and degree of control of the employer over the work; and (2) the opportunity for profit or loss—weighed in favor of the same classification, there was a “substantial likelihood” that it was the proper classification.[1] 

DOL Aims to Align the Rule with Court Ruling and FLSA’s “Text and Purpose”

The DOL is seeking to rescind the 2021 Rule and revise the framework for evaluating classification of workers as employees or independent contractors under the FLSA in an effort to align the rule with judicial precedent and the Act’s original intent.  The new proposed rule would emphasize a “totality of the circumstances” approach to classification that would balance factors in the employer/worker “work” relationship equally.

Residential Healthcare Employers Should be Wary of Risks of Misclassification

Misclassification of workers can be expensive for employers, including significant fines and back taxes for violations. Fines can be up to 100% of the (federal and state) employment tax due—as well as liability, including but not limited to, social security not withheld.  Beyond fines and back taxes, misclassification could result in major business disruption, including a “stop work order.”  For example, as of April 1, 2020, New Jersey enacted a law allowing for state enforcement of stop work orders related to wage and hour violations.

Comment Period for New Proposed Rule Is Open for Forty-Five (45) Days

Comments to the proposed rule can be submitted within 45 days after October 13, 2022 —through 11:59 pm on November 28, 2022.  Employers and employees can submit comments: (1) through the Federal eRulemaking Portal; or (2) by regular mail addressed to Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue, N.W., Washington, D.C. 20210.

If you have questions or would like additional information related to the current or proposed Rule, please contact Richard Scharlat at (scharlatr@foxrothschild.com, 616.601.7668).

[1] The other three (3) factors are: the amount of skill required, the level permanence of the working relationship, and whether the work is part of an integrated unit of production.