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On September 22, 2020, the Department of Labor announced a proposed rule that would clarify the appropriate test for determining whether a worker is an employee or an independent contractor for purposes of the Fair Labor Standard Act (FLSA). The proposed rule will make it easier for employers to classify workers as independent contractors and otherwise avoid violating the FLSA’s minimum wage, overtime and recordkeeping requirements that apply to employees but not independent contractors. 

In the proposed rule the DOL clarified its approach for applying the “economic reality” test used to determine a worker’s status as an employee or an independent contractor. According to the DOL the “ultimate inquiry is whether, as a matter of economic reality, the worker is dependent on a particular individual, business, or organization for work (and is thus an employee) or is in business for him – or herself (and is thus an independent contractor).” 

To discern economic dependence, the DOL in its proposed rule focuses (1) on the nature and degree of the worker’s control over the work and (2) the worker’s opportunity for profit or loss.  The DOL also considers, but to a lesser degree, (3) the amount of skill required for the work, (4) the degree of permanence of the working relationship between the worker and the potential employer, and (5) whether the work is part of an integrated unit of production. Finally, in its proposed rule, the DOL advises that actual practice is of greater relevance as opposed to the parties’ purported arrangement.

Importantly, the proposed rules contain examples of what type of facts will support a particular finding. For example, with respect to the control factor, the proposed rule states as follows:

This factor weighs towards the individual being an independent contractor to the extent the individual, as opposed to the potential employer, exercises substantial control over key aspects of the performance of the work, such as by setting his or her own schedule, by selecting his or her projects, and/or through the ability to work for others, which might include the potential employer’s competitors. In contrast, this factor weighs in favor of the individual being an employee under the Act to the extent the potential employer, as opposed to the individual, exercises substantial control over key aspects of the performance of the work, such as by controlling the individual’s schedule or workload and/or by directly or indirectly requiring the individual to work exclusively for the potential employer. Requiring the individual to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships) does not constitute control that makes the individual more or less likely to be an employee under the Act.

Likewise, with respect to the opportunity to make a profit, the proposed rule states:

This factor weighs towards the individual being an independent contractor to the extent the individual has an opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen or judgment) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work. While the effects of the individual’s exercise of initiative and management of investment are both considered under this factor, the individual does not need to have an opportunity for profit or loss based on both for this factor to weigh towards the individual being an independent contractor. This factor weighs towards the individual being an employee to the extent the individual is unable to affect his or her earnings or is only able to do so by working more hours or more efficiently.

The DOL’s proposed approach for classifying workers as employees or independent contractors stands in contrast to the Obama-era approach and from the approach taken in various states. Under the Obama administration, the DOL issued guidance intended to restrict an employer’s ability to classify workers as independent contractors under the FLSA. At that time the DOL took the position that the economic reality test factors should be given equal weight, with an overarching goal of broadly defining the scope of the employment relationship under the FLSA.   

The Trump administration withdrew this guidance in 2017, signaling a shift towards a more employer-friendly approach to independent contractor classification. The DOL’s proposed rule would effectively codify the Trump administration’s intention to provide employers greater clarity and certainty in evaluating whether workers should be classified as independent contractors or employees. 

The DOL has fast-tracked the period for public comment, which means the proposed rule may be finalized by January 2021. While the DOL usually affords the public 60 or 90 days to comment on economically significant rulemakings, in this instance, the DOL will only accept public comments for 30 days after the rule is published in the Federal Register.

If the proposed rule is codified in its present form, employers in jurisdictions where federal law and the state/local approach align will enjoy the benefit of a streamlined classification rule that offers greater predictability. Meanwhile in states, such as California, that have more stringent limitations, employers will need to carefully evaluate their relationships with their workers and decide on a classification approach that accounts for the nuances under both federal and state/local law.