Adjusting to New Economic Realities: Department of Labor Proposes Worker Classification Test

Jones Day

The Department of Labor ("DOL") released a proposed rule on September 22, 2020, containing a new test for determining independent contractor status under the Fair Labor Standards Act ("FLSA"). In many cases, the new test would make it easier to classify workers as independent contractors rather than employees, which classification would determine, among other things, whether the worker receives the FLSA's minimum wage and overtime protections.

Courts have used various multifactor tests to determine whether a worker is dependent on another's business for work (an employee) or in business for themselves (an independent contractor). The DOL's proposed rule focuses on two "core factors": (i) the nature and degree of the individual's control over the work, and (ii) the individual's opportunity for profit or loss. If these factors "both point towards the same classification," then, under the proposed rule, the individual likely should be classified in that manner. Other factors considered are the amount of skill required for the work, the degree of permanence of the working relationship between the individual and potential employer, and whether the work is part of an integrated unit of production.

Although these factors appear similar (or the same) as factors courts currently use, the proposed rule defines them differently than many courts do. With respect to control, for example, the proposed rule clarifies that actual, exercised control matters, not potential control, and a requirement to comply with legal or safety standards―provisions often included in franchising and other business contracts―"does not constitute control that makes the individual more or less likely to be an employee under the Act." Additionally, whether the type of work performed is within the usual course of the entity's business―a question that can be dispositive of worker status under laws such as California's A.B. 5―is irrelevant under the DOJ's test.

Even if the proposed rule is codified as a regulation, it will not be binding on courts or preempt state laws with broader definitions of "employee." Nevertheless, the DOJ itself would use this test and it could receive deference from courts, potentially changing the outcome in future FLSA cases.

Mallory McKenzie, an associate in the Washington, D.C. office, assisted in the preparation of this Alert.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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