WASHINGTON — The U.S. Department of Labor announced a new and final rule for employers and workers. This rule will clarify when a worker qualifies as an employee and when they are considered an independent contractor under the Fair Labor Standards Act. But at least one major organization representing builders and contractors is opposed to the new regulations.

The rule provides guidance on classification and seeks to combat employee misclassification: a problem that impacts workers’ rights to minimum wage and overtime pay, facilitates wage theft, and allows some employers to undercut their law-abiding competition which hurts the economy at-large, the Department of Labor (DOL) stated in a press release.

“Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” Acting Secretary of Labor Julie Su explained in the release from the DOL. “This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned.” 

Associated Builders and Contractors released a statement from Vice President of Regulatory, Labor and State Affairs Ben Brubeck opposing the U.S. Department of Labor’s independent contractor final rule under the Fair Labor Standards Act.

“By undermining the flexible, independent work for millions of Americans, President Joe Biden’s DOL is choosing to move forward with a final rule that creates an ambiguous and difficult-to-interpret standard for determining independent contractor status,” said Brubeck in an ABC press release. “Under the rule’s multifactor test, employers will now be forced to guess which factors should be given the greatest weight in making the determination. Instead of promoting much-needed economic growth and protecting legitimate independent contractors, the final rule will result in more confusion and expensive, time-consuming, unnecessary and often frivolous litigation, as both employers and workers will not understand who qualifies as an independent contractor."

Since the 1940s, the Department and courts have applied an economic reality test to determine whether a worker is an employee or an independent contractor under the FLSA, grounded in the Act's broad understanding of employment. The ultimate inquiry is whether the worker is economically dependent on the employer for work (an employee) or is in business for themself (independent contractor).

The 2021 IC Rule marked a departure from the consistent, longstanding adoption and application of the economic reality test by courts and the Department of how to determine whether a worker is an employee or an independent contractor under the FLSA. It identified five economic reality factors to guide the inquiry into a worker's status as an employee or independent contractor.

Two of the five identified factors—the nature and degree of control over the work and the worker's opportunity for profit or loss—were designated as “core factors” that were the most probative and carried greater weight in the analysis. The 2021 IC Rule stated that if these two core factors pointed towards the same classification, there was a substantial likelihood that it was the worker's accurate classification.

In addition to rescinding the 2021 IC Rule, the final rule addresses whether workers are employees or independent contractors under the FLSA. Instead of using the “core factors” set forth in the 2021 IC Rule, this final rule returns to a totality-of-the-circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity. 

The final rule provides guidance on how six economic reality factors should be considered—opportunity for profit or loss depending on managerial skill, investments by the worker and the potential employer, the degree of permanence of the work relationship, the nature and degree of control, the extent to which the work performed is an integral part of the potential employer's business, and skill and initiative. Just as the 2021 IC Rule, additional factors may also be considered if they are relevant to the overall question of economic dependence.

“Regrettably, the confusion and uncertainty resulting from the final rule will cause workers who have long been properly classified as independent contractors in the construction industry to lose opportunities for work,” said Brubeck in his statement. “Legitimate independent contractors are a vital part of the construction industry, providing specialized skills, entrepreneurial opportunities and stability during fluctuations of work common to the industry. They play an important role for large and small contractors, delivering construction projects safely, on time and on budget for their government and private customers. This move will jeopardize the ability of construction firms to continue the industry’s longstanding practice of utilizing legitimate independent contractors.”

ABC strongly supported the 2021 final rule, which simplifies and clarifies the factors for determining when a worker is an independent contractor versus an employee under the FLSA. The Biden DOL froze and then rescinded the 2021 rule over the opposition of ABC and other industry associations.

In October 2022, the DOL announced a new proposed rule to rescind and replace the 2021 final rule and ABC submitted comments in opposition on Dec. 13.