US Department of Labor Announces Proposed Rule on Classifying Employees, Independent Contractors; Seeks to Return to Longstanding Interpretation

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Agency: Wage and Hour Division
Date: October 11, 2022
Release Number: 22-1526-NAT

Misclassification continues to deny workers’ rightful wages; hurt businesses, economy

WASHINGTON – The U.S. Department of Labor will publish a Notice of Proposed Rulemaking on Oct. 13 to help employers and workers determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act.

The proposed rule would provide guidance on classifying workers and seeks to combat employee misclassification. Misclassification is a serious issue that denies workers’ rights and protections under federal labor standards, promotes wage theft, allows certain employers to gain an unfair advantage over law-abiding businesses, and hurts the economy at-large.

The NPRM proposes a framework more consistent with longstanding judicial precedent on which employers have relied to classify workers as employees or independent contractors under the FLSA. The department believes the new rule would preserve essential worker rights and provide consistency for regulated entities.

“While independent contractors have an important role in our economy, we have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation’s most vulnerable workers,” said Secretary of Labor Marty Walsh. “Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages. The Department of Labor remains committed to addressing the issue of misclassification.”

Specifically, the proposed rule would do the following:

  • Align the department’s approach with courts’ FLSA interpretation and the economic reality test.
  • Restore the multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the FLSA.
  • Ensure that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.
  • Revert to the longstanding interpretation of the economic reality factors. These factors include the investment, control and opportunity for profit or loss factors. The integral factor, which considers whether the work is integral to the employer’s business, is also included.
  • Assist with the proper classification of employees and independent contractors under the FLSA.
  • Rescind the 2021 Independent Contractor Rule.

The department is responsible for ensuring that employers do not misclassify FLSA-covered workers as independent contractors and deprive them of their legal wage and hour protections. Misclassification denies basic worker protections such as minimum wage and overtime pay and affects a wide range of workers in the home care, janitorial services, trucking, delivery, construction, personal services, and hospitality and restaurant industries, among others.

Before publication of today’s proposed rulemaking, the department’s Wage and Hour Division considered feedback shared by stakeholders in forums during the summer of 2022 and will now solicit comments on the proposed rule from interested parties. The division encourages all stakeholders to participate in the regulatory process. Comments, which must be submitted from Oct. 13 to Nov. 28, 2022, should be submitted online or in writing to the Division of Regulations, Legislation and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Ave. NW, Washington, DC 20210.

Learn more about the Wage and Hour Division.

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What Is Wage Theft — and Could You Be a Victim?

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Katie Couric Media – July 20, 2022

We break down this increasingly prevalent form of exploitation in the workplace.

It’s an increasingly buzzy term doing the rounds in the working world, but are you familiar with the concept of wage theft? And would you be able to spot this phenomenon if it popped up in your office? We’ve broken down some of the most common forms of wage theft — plus how employers may be trying to get away with them — and got the scoop from an employment law attorney on how to proceed if you think you may be a victim.

What is wage theft?

Essentially, wage theft occurs when an employer doesn’t pay wages or other benefits that an employee has earned.

Some forms of wage theft are easier to spot than others, but there are some key signs to look out for. If you’re an hourly worker who regularly works overtime without being paid for those extra hours, you’re a victim of wage theft. Other common forms include misclassifying an employee as an independent contractor, not paying earned time off or holidays, being asked to complete work tasks when you’re off the clock, or constantly having to arrive early or stay late without compensation.

“Here’s an example pulled from one of our current claims,” says Joshua Konecky, an employment law partner at Schneider Wallace Cottrell Konecky LLP. “A worker must be at the warehouse at a specific time, such as 7 a.m. If they are not there, they will not get work for that shift. But they must commute to the warehouse and wait, sometimes as much as an hour or two, before they’re assigned work or released for the day. They should be paid for that waiting time.”

Being forced to work through meal breaks, being made to pay upfront for a uniform (if, after the cost is deducted from your paycheck, you’re being paid less than minimum wage), and employers skipping your final check after you’ve left a job all count as wage theft, too. …

Is anything being done about this?

Following some setbacks, yes. The number of investigators — the people who respond to complaints about wage theft — at the Wage and Hour Division (WHD) in The Department of Labor dropped by nearly 16 percent under the Trump administration. In late January however, the department announced plans to hire 100 new investigators, and it’s expected to take a tougher approach with employers moving forward.

Some states have also been increasing their own deterrents against less diligent employers and companies. Connecticut now requires employers to pay employees back double the amount of any wages stolen, and Minnesota has a law that specifies criminal charges with jail time and fines of up to $100,000 for those who commit wage theft. In Washington, D.C., employers who commit wage theft can be found guilty of a misdemeanor and sentenced to up to 90 days in prison, in addition to a $10,000 fine for each affected employee.

What should I do if I’ve been a victim of wage theft?

First, however you decide to proceed, be sure to keep a record of every instance when you suspect you’ve been a victim.

Then, speak with your manager. A responsible supervisor should sort it out right away, but if they don’t, take the issue to a different manager, or to human resources. Keep records of these interactions too.

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Former Obama labor official details how to stop misclassification

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Smith, speaking at forum in Newark, said interagency, coordinated enforcement and data sharing are two keys

By Alex Wolmart
Newark | Dec 6, 2018 at 1:56 pm

While many brought their worries and hardships, Patricia Smith brought solutions.

Smith – senior counsel at the Manhattan-based nonprofit the National Employment Law Project – broke down the issue of employee misclassification at an event sponsored by the New Jersey Department of Labor and Workforce Development on Wednesday in Newark.

Misclassification is misclassifying workers as independent contractors by filing 1099s rather than W2s. Employers who misclassify avoid having to pay unemployment and disability taxes.

Misclassification, by itself, is not illegal,” she said. “What’s illegal is the consequences of misclassification. When you find misclassification, you’re going to have, depending upon what you’re enforcing, a remedy.”

Smith, a former labor official in President Barack Obama’s administration, has been involved with misclassification for more than 20 years. She said interagency, coordinated enforcement; data sharing; a robust public and press outreach strategy; agency cross-training and joint employment; criminal referrals in appropriate cases; and required reports to either the Legislature or governor on a frequent basis are how the misclassification of employees as independent contractors will be remedied.

Labor Commissioner Robert Asaro-Angelo led the forum. He told the room of a few dozen workers, union reps and lawyers that Gov. Phil Murphy gets it.

“We’re at a time in our state where our governor and this administration wants to stand up for the right to protections, for the women and men who work hard and deserve the opportunities and benefits that they are entitled to,” he said.

And while many public advocates came to give their testimony, it was Smith who had the most to say.

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California Supreme Court Adopts Broad New Misclassification Test

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By Ashton Riley © Fisher Phillips
May 2, 2018

In a groundbreaking decision, the California Supreme Court adopted a new legal standard that will make it much more difficult for businesses to classify workers as independent contractors, drastically changing the legal landscape across the state.

The decision will directly affect the trucking and transportation industry because the workers involved in the case were delivery drivers, but it also has the potential to affect nearly every other industry-including the emerging gig economy.

Specifically, the court adopted a new standard for determining whether a company “employs” or is the “employer” for purposes of the California Wage Orders.

Under the new “ABC” test, a worker is considered an employee under the wage orders unless the hiring entity establishes all three of these prongs:

  • The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact.
  • The worker performs work that is outside the usual course of the hiring entity’s business.
  • The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

This decision not only expands the definition of “employee” under the California Wage Orders, it also imposes an affirmative burden on companies to prove that independent contractors are being properly classified.

As a result of today’s decision, all California businesses with independent contractors will need to conduct a thorough evaluation of such workers to determine whether they are properly classified.

The case is Dynamex Operations West, Inc. v. Superior Court, Cal., No. S222732 (April 30, 2018).

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AG investigation convicts Queens construction companies of ripping off employees

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By Mark Hallum
FEBRUARY 20, 2018

State Attorney General Eric Schneiderman announced the conviction of three Queens construction companies after they pleaded guilty to misclassifying employees as independent contractors to avoid paying overtime.

Lotus-C Corporation of Jackson Heights, Johnco Contracting Inc. of Bayside, and RCM Painting Inc. of Maspeth were all convicted of felony counts of grand larceny and falsifying business records in Queens Supreme Court on Feb. 7 and will pay over $730,000 in restitution for missed wages and unpaid taxes.

“Led by pure greed, the defendants in this case attempted to sidestep the law – misclassifying their employees as a way to stiff them on the overtime pay they rightfully earned,” Schneiderman said. “My office will continue to crack down on those who seek to steal from their workers in order to line their own pockets.”

The investigation by the attorney general’s office revealed the defendant corporations failed to properly pay employees – usually carpenters and painters – for overtime by falsely filing them as independent contractors. Over 150 workers were affected and did not receive the time and half pay for working over 40 hours a week required by law.

…

As part of the plea deal, the three corporations will be dissolved and Cesar Agudelo of Lotus-C and John Massino of RCM Painting and Johnco will be barred from bidding on public works contracts for up to five years.

About $371,000 will go to the workers as restitution while another $360,000 from the defendants will go to unpaid unemployment insurance contributions.

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‘Worker misclassification’ seen as growing threat by contractors, unions in the Region

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Andrew Steele
Sep 3, 2017

As companies strive to increase profits amid a changing economy and consumer habits, the discussion often centers on challenges posed by the “gig economy” and its impact on work and employment.

Upstart companies like the Uber ride-sharing service tend to be the focus of concern; recent reports of such companies’ drivers speaking out against perceived company efforts to trim their pay bear this out.

But the growing use of short-term contracts in industries such as construction is threatening traditional employment in a way some say has reached a critical phase.

The fight is over what’s commonly called “employee misclassification” – or payroll fraud, in the view of unions and contractors. It involves an employer hiring workers as freelancing contractors who should be full-time employees, thereby allowing the employer to avoid paying payroll taxes, and worker’s compensation and unemployment insurance premiums, among other costs.

“It’s a problem that’s been around for many decades,” said Dewey Pearman, executive director of the Construction Advancement Foundation of Northwest Indiana. “But it’s becoming epidemic.”

Officials with the Indiana/Kentucky/Ohio Regional Council of Carpenters visit job sites frequently to talk to carpenters, said Scott Cooley, senior representative at the union’s local headquarters. He said he often talks to contract workers who he believes should be formal employees.

“We run into it all the time,” Cooley said. “It’s just a regular occurrence.”
Some workers in question receive a federal 1099 form at the end of the year, but others aren’t reported at all, and are just paid cash for their work.

‘No magic’ in defining employment

Classifying employees properly isn’t an exact science. It involves several variables, including the degree of company control over the employee; the financial arrangement, including who provides tools and supplies; whether there are benefits such as a pension and insurance; and whether work performed is a key component of the business’ activity.
The Internal Revenue Service lists 20 factors to consider, and states in its guidance on the matter that “there is no ‘magic’ or set number of factors that ‘makes’ the worker an employee or an independent contractor.”

But contractors and the carpenters’ union say some building projects are rife with contract workers who clearly are misclassified: their hours and duties are assigned by their employer, their tools and supplies are provided, and their work is a core function of the company – all factors that generally make one an employee, not a contract worker, in the eyes of the law.

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Why You Should Care About Compliance

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Forbes.com
POST WRITTEN BY Gene Zaino
JUL 27, 2017 @ 08:00 AM

As the on-demand economy grows, independent professionals are becoming a larger and more essential part of the workforce. The number of self-employed Americans rose to nearly 41 million in 2017 and is predicted to rise to 47.6 million in just five years. This shift away from traditional employment allows independents to work on their own terms while organizations that engage them fill skills shortage gaps, gain staffing flexibility, and realize lower costs.

Coupled with this growth, however, we’ve seen an increase in federal and state government efforts to combat employees being misclassified as independent contractors. In June, the Department of Labor (DOL) removed the Obama-era guidance about joint employment and independent contractors. While it has been widely reported that this withdrawal does not change the legal responsibilities of employers under the Fair Labor Standards Act (FLSA), it may indicate that the current administration is taking a more traditional view of employment relationships, as opposed to past interpretation of these documents that assumed most workers were employees.

We’ve seen the results of these actions in the increase in class-action lawsuits, such as Citigroup’s $325,000 settlement for misclassification of technology workers, Zenefits’ $3.4 million payment to misclassified employees for unpaid overtime, and FedEx’s $228 million settlement for misclassification of delivery drivers.
Lawsuits like these are just one of many very real consequences of misclassification, but avoiding a misclassification suit isn’t the only reason to care about how one should engage independent talent.

Here are three reasons compliance should be top of mind for all organizations that engage independent professionals.

Compliance Aids In Proper Classification

Classification of independent contractors is not a clear-cut process. Federal, state and local government agencies use a variety of tests to determine whether or not a worker is a true independent contractor.

Just because independent contractors call themselves an independent contractor doesn’t mean they are one in the eyes of the law. Independents come from various backgrounds and experience levels and have different levels of self-employability. When engaging independent talent, it’s up to organizations to make a final determination of classification, but because tests vary from agency to agency and because regulations are constantly changing, these decisions can be complex.

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Q&A: COLLABORATION IS KEY TO CRACKDOWN ON EMPLOYEE MISCLASSIFICATION

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Sep 20, 2016 / by Katherine C. Parris

Employee misclassification causes headaches for both workers and employers, and the federal government and the states are joining hands to ease the pain.

Misclassification often has substantial consequences for all parties involved-employers and workers, as well as the federal government and the states. Misclassifying an employee as an independent contractor may result in denial of minimum wages, overtime compensation, family and medical leave, and unemployment and workplace safety protections. Employers may face costly lawsuits and be liable for unpaid overtime and minimum wages, as well as back pay, court costs and attorneys’ fees.

For these reasons, the Department of Labor is entering into enforcement partnerships with state agencies for “information sharing and coordinated enforcement” in support of its Misclassification Initiative, according to its website.

Joint federal-state efforts likely will continue to play a large role in the future of worker misclassification enforcement as more states enter into formal agreements with the DOL.

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State fines Texas-based construction company $767K for misclassifying workers

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Sep 20, 2016, 7:29am HST
Duane Shimogawa

The state Department of Labor and Industrial Relations has fined Texas-based R&R Construction Services $767,095 for the misclassification of its workers as independent contractors that are part of the Maile Sky Court hotel-condominium redevelopment project in Waikiki.

The state said Monday that R&R has 20 days to appeal the citations.

“Law-abiding contractors who pay their fair share face unfair competition, and workers suffer when deprived of their rights and benefits,” Linda Chu Takayama, director of DLIR, said in a statement. “The visitor industry and a pleasant visitor experience is important to Hawaii, but Hawaii’s working people and law-abiding contractors need to benefit fairly.”

R&R allegedly misclassified 65 construction workers as independent contractors and, by doing so, it avoided requirements to provide unemployment, workers compensation, temporary disability and prepaid health care insurances, according to the state.

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US DEPARTMENT OF LABOR, PENNSYLVANIA DEPARTMENT OF LABOR & INDUSTRY SIGN AGREEMENT TO PROTECT WORKERS FROM MISCLASSIFICATION

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WHD News Brief: 08/04/2016
Release Number: 16-1603-NAT

Participants: U.S. Department of Labor’s Wage and Hour Division
Pennsylvania Department of Labor & Industry

Partnership description: The U.S. Department of Labor’s Wage and Hour Division and the Pennsylvania Department of Labor & Industry signed a three-year Memorandum of Understanding intended to protect employees’ rights by preventing their misclassification as independent contractors or other non-employee statuses. The two agencies will provide clear, accurate and easy-to-access outreach to employers, employees and other stakeholders; share resources; and enhance enforcement by conducting coordinated investigations and sharing information consistent with applicable law.

Background: The division is working with the U.S. Internal Revenue Service and 31 other U.S. states to combat employee misclassification and to ensure that workers get the wages, benefits and protections to which they are entitled. Labeling employees as something they are not – such as independent contractors – can deny them basic rights such as minimum wage, overtime and other benefits. Misclassification also improperly lowers tax revenues to federal and state governments, as create losses for state unemployment insurance and workers’ compensation funds.

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