DOL Clarifies Independent Contractor Classification in Proposed Rule
In what appears to be an attempt to make it easier for businesses to properly classify an independent contractor, the Department of Labor (DOL) has proposed a rule clarifying the classification test to determine whether a worker is truly an independent contractor or is actually an employee under the Fair Labor Standards Act (FLSA). The DOL’s September 22, 2020 Press Release states, “The Department’s proposal aims to bring clarity and consistency to the determination of who’s an independent contractor under the Fair Labor Standards Act,” said Secretary of Labor Eugene Scalia. “Once finalized, it will make it easier to identify employees covered by the Act, while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.”
The DOL also further states, “The rule we proposed today continues our work to simplify the compliance landscape for businesses and to improve conditions for workers,” said Wage and Hour Division Administrator Cheryl Stanton. “The Department believes that streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility.”
In the proposed rule, the DOL is considering the actual practice to be considered more relevant than what may be contractually or theoretically possible in the determination of whether a worker is an independent contractor or employee.
DOL’s proposed rule adopting the “economic reality” test would be used to determine a worker’s status as an FLSA employee or independent contractor with an analysis of whether the worker is in business for himself or herself (independent contractor) or is economically dependent on a putative employer for work (employee). Under the proposed rule, the two core factors to determine if a worker is economically dependent on someone else’s business or is in business for himself or herself are:
Worker’s Control over the Work -The nature and degree of the worker’s control over the work, and
Profit and Loss - The worker’s opportunity for profit or loss based on initiative and/or investment.
Three other factors that are being highlighted as guideposts in the analysis are:
The amount of skill required for the work;
the degree of permanence of the working relationship between the worker and the potential employer; and
whether the work is part of an integrated unit of production.
The significance of this test is especially important in areas where the Wage and Hour Division of the DOL is responsible for enforcing compliance under the many labor standards of Federal law such as enforcing federal minimum wage, overtime pay, and recordkeeping of the FLSA. Note that employers are generally still responsible under other classifications tests for Independent Contractors such as the IRS Test, NLRA Test and local State laws.
Written comments on the proposed rule are being accepted on or before October 26, 2020 as set forth in the proposed rule in the Federal Register. Visit the DOL website for further guidance and updates.