The Department of Labor (DOL) recently issued proposed regulations (RIN 1235-AA43) to clarify the analysis for determining employee and independent contractor classifications under the Fair Labor Standards Act (FLSA). The DOL states that these proposed regulations are more consistent with judicial precedent and the FLSA’s text and purpose than the existing worker classification rules that were issued in January 2021.
The January 2021 rules included a five-factor test that favored independent contractor classifications, largely by focusing on two rules:
- The nature and degree of the worker’s control over the work
- The worker’s opportunity for profit or loss based on personal initiative or investment
The new proposed rules would essentially adopt the January 2021 rules by incorporating the two aforementioned factors into a six-factor test, which would also consider:
- Investments by the worker and the employer
- The degree of permanence of the working relationship
- The extent to which the work performed is an integral part of the employer’s business
- The degree of skill and initiative exhibited by the worker
The proposed rules also state that DOL may consider additional factors under certain circumstances.
Notably, the proposed rules may make it more difficult to classify certain workers as independent contractors (instead of employees subject to the FLSA rules). Although these proposed regulations do not directly apply with respect to worker classification determinations for tax purposes, taxpayers should anticipate significant commentary and challenges to the new rules which could lead to future tax implications.
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