DOL Publishes Proposed Rule on Independent Contractor Classification While the proposed rule retains the “economic realities test,” it consolidates the existing factors used to guide analysis of independent contractor status under the Fair Labor Standards Act and focuses on two “core factors.” The U.S. Department of Labor (DOL) published a Notice of Proposed Rulemaking on September 25 seeking to clarify whether a worker is an employee covered under the Fair Labor Standards Act (FLSA) – and thus entitled to minimum wage and overtime protections – or an independent contractor. While the Proposed Rule retains the longstanding “economic realities” test, it aims to streamline the factors and clarifies that the ultimate inquiry when evaluating independent contractor status is whether a worker is in business for herself or himself or is economically dependent on the potential employer. Overview of Proposed Rule The Proposed Rule would add a new section (Part 795) to the FLSA Regulations, titled: “Employee or Independent Contractor Classification under the Fair Labor Standards Act.” Under the Proposed Rule, the DOL would replace its existing six-factor “economic realities” test for determining a worker’s employment relationship under the FLSA with a five-factor test. While similar to the existing test, the Proposed Rule consolidates the current six-factor test, makes it easier to determine which facts belong under which factor, and elevates a worker’s control over his or her work and the opportunity for profit or loss as the two “core factors.” The proposed Rule also emphasizes that the relevant question when determining proper classification is, as a matter of economic reality, whether a worker is in business for him or her, or is economically dependent on the potential employer. Comments on the Proposed Rule are due October 26, unless DOL extends the comment period. Determining Factors The Proposed Rule identifies five non-exhaustive factors that should guide the analysis of whether a worker is an employee or an independent contractor. These include two “core factors”: 1. The nature and degree of the worker’s control over the work; 2. The worker’s opportunity for profit or loss based on initiative and/or investment Which the proposed Rule treats as more probative of the question of economic dependence, and thus are afforded greater weight in the analysis. This is a departure from the existing “economic realities” test, where no factor is determinative and each factor receives equal weight. The Two Core Factors The nature and degree of the worker’s control over the work: Under the Proposed Rule, this factor weighs toward classifying a worker as an independent contractor where the worker as opposed to the potential employer, exercises substantial control over key aspects of the performance of the work. The Proposed Rule identifies several examples – such as the worker
setting his or her own work schedule, selecting his or her assignments, and retaining the ability to work for others (including competitors of the potential employer) – that signify that the worker possesses substantial control over his or her own work. The worker’s opportunity for profit or loss: The second core factor that weighs towards classifying a worker as an independent contractor is where the worker has an opportunity to earn profits or incur losses based on (1) the exercise of personal initiative, including managerial skill or business acumen; and/or (2) the management of investments in or capital expenditure on items such as helpers, equipment, or material. Conversely, if a worker is unable to affect his or her earnings through initiatives or investment, or is only be able to do so by working more hours or more efficiently, this factor weighs toward classifying a worker as an employee. The three other factors The amount of skill required for the work: Under the Proposed Rule, this factor weighs in favor of classifying a worker as an independent contractor where the work at issue requires specialized training or skill the potential employer does not provide. Otherwise, it weighs in favor of classifying a worker as an employee. The degree of permanence of the working relationship between the worker and the potential employer: This factor weighs in favor of classifying a worker as an independent contractor where the working relationship with the potential employer is by design definite in duration or sporadic. In contrast, a working relationship that is indefinite in duration or continuous suggests that the worker is an employee. Whether the work is part of an integrated unit of production: The factor weighs in favor of classifying a worker as an independent contractor where his or her work is segre-gable from the potential employer’s production process. This factor is narrower than the “integral to the business” factor applied by courts and under DOL’s previous interpretation of the “economic realities” test. Thus, instead of looking at whether the work is “integral” to the business, the Proposed Rule looks at whether the work is a component of the potential employer’s integrated production process for a good or service. The Proposed Rule would Supersede Existing DOL Guidance Notably, the Proposed Rule states that it supersedes all prior DOL guidance and interpretations (including administrative rulings, opinion letters, and/or enforcement policies) addressing the existing “economic realities” test that are inconsistent or in conflict with the new Part 795. This is a significant development as the same set of facts could potentially result in different outcomes when analyzed under the factors identified in the existing “economic realities” test as opposed to those in the Proposed Rule. The Proposed Rule also includes a provision that employees may rely upon Part 795 (when finalized) as a “safe harbor” defense under the FLSA. Impact on State Law Tests The Proposed Rule applies only to the FLSA. Therefore, it will have no impact on any state laws that have not adopted the FLSA for determining whether a worker should be classified as an employee or independent contractor. The Proposed Rule represents a markedly different standard than is applied by certain states, such as California when analyzing a worker’s status as an employee or independent contractor. Accordingly, employers should continue to review whether and how different state laws may apply to their workforces.
Timeline and Next Steps The Proposed Rule contains a very short comment period – only a few days from the date of publication in the Federal Register. News reports indicate that DOL leadership is attempting to fast-track and finalize the regulation before the end of the current administration’s first term. It is unclear, however, whether DOL would elect to move forward with the Proposed Rule (or an ensuring final rule) following a potential change in administration in January 2021. Moreover, potential Democratic control of the White House and Senate raises the possibility of a Congressional Review Act override of any final rule. Given the potential magnitude of any final rule, employers should consider submitting comments to ensure that they have a voice in shaping the final rule. Securecheck360 will continue to monitor developments related to the Proposed Rule, and our DOL and administrative law experts are available to assist in submitting comments.