A coalition of more than 200 business groups, including the NAHB, Associated Builders and Contractors, Associated General Contractors of America, and state and local Chambers of Commerce, submitted formal comments opposing the U.S. Department of Labor’s proposed rule updating the independent contractor test.
“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 group wrote in its comment letter submitted to Jessica Looman, principal deputy administrator for the U.S. Department of Labor’s Wage and Hour Division.
The proposed rule, published in October, would update the test for determining whether a worker is an employee under the Fair Labor Standards Act (FLSA). The rule is intended to combat employee misclassification and would update the test for independent contractor status under the FLSA that went into effect in early 2021.
According to the group, the proposed rule would “negatively impact” employers and independent contractors because the “undefined terms and vague concepts create a scenario where a hiring entity would never be confident it has correctly classified a worker as an independent contractor.” The group argues the language of the proposed rule biases decisions toward employee classification and “has the potential to all but eliminate, or at least severely limit, the use of the independent contractor model in the modern workplace.”
The proposed rule attempts to restore a “totality-of-the-circumstances” analysis, setting forth six factors to consider when determining whether a worker is an employee or an independent constructor. The six factors include the following questions:
- 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 loss?
- 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 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).
According to the executive summary of the proposed rule, the updated test is not intended to “disrupt the businesses of independent contractors who are, as a matter of economic reality, in business for themselves.” The business groups opposing the proposed rule argue 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. Additionally, the group argues the test would threaten to impact many industries that rely on the subcontractor business model, including residential construction.
The independent contractor rule, which went into effect in early 2021, was supported by the NAHB, as the organization said it provided “much-needed clarity, uniformity, and simplicity” to the independent contractor analysis and accounted for “the realities of the modern workplace.”
“[The 2021 test] allows businesses and their workers to structure mutually beneficial relationships most suitable to those realities,” the comments submitted by the group state. “The proposed rule, which would rescind the 2021 [independent contractor] rule, would do just the opposite. Indeed, by design, the proposed rule reverts to the original subjective “totality of the circumstances” analysis with an array of factors, none carrying more weight than the others, with the effect being an increase in litigation and inconsistent results in the courts.”