DOL Publishes New Guidance for Classifying Independent Contractors

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  • The U.S. Department of Labor proposed new regulations which, if implemented, will provide a relaxed framework for employers to classify workers as independent contractors when compared to current case law.
  • This Holland & Knight alert addresses some of the key components in the proposed changes.

The U.S. Department of Labor (DOL) on Sept. 22, 2020, proposed new regulations designed to codify criteria to identify independent workers under the Fair Labor Standards Act (FLSA). Independent contractors are not employees within the meaning of the FLSA, and thus are not subject to federal minimum wage and overtime requirements. To date, there has been no codified federal guidance to distinguish independent contractors from employees. The resultant ambiguity has led to diverse case law across multiple jurisdictions with no consistent standard throughout the 50 states.

If the proposed regulations are implemented, the new standard would refocus the factors for defining an independent contractor for purposes of the FLSA. This Holland & Knight alert addresses some of the key components of the proposed regulations.

New Standard for Independent Contractors

Under the proposed regulations, the "ultimate inquiry" is one of economic dependence. If a worker is, as a matter of "economic reality," dependent on the employer for work, then the worker is classified as an employee. By contrast, if a worker is in business for themselves as a matter of economic reality, then they are an independent contractor.

The proposed regulations identify five factors to guide the economic dependence analysis. The factors are:

  1. The Nature and Degree of the Individual's (i.e., Worker's) Control Over the Work: This factor weighs whether workers set their own schedule, select their own projects and whether they have the ability to work for their employer's competitors. If workers set their own schedule, select which projects to work and can work for a competitor, these facts would suggest that the worker is an independent contractor. Notably, the regulations provide that requiring the worker 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" are not relevant under the economic dependence analysis. That is, these types of requirements to do point toward or away from an employment relationship or contractor relationship.
  2. The Individual's Opportunity for Profit and Loss: This factor analyzes whether workers have the potential to earn profits or incur losses based on their own initiative, which includes managerial skill, business acumen or judgment. This factor also evaluates the impact on a worker's revenue through the worker's investment in his or her business or the worker's control of costs and expenditures. The inability of a worker to change his or her earnings through initiative (other than working more hours) suggests an employment relationship.
  3. The Amount of Skill Required for the Work: This factor considers to what extent the position requires specialized skill that the employer does not provide. If an employer provides all of the training necessary for a worker to accomplish his or her job, that would suggest the worker is an employee. By contrast, if the employer provides little or no training and the worker provides all of the skills necessary for the job, that would suggest the worker is an independent contractor.
  4. The Degree of Permanence of the Working Relationship Between the Individual and the Employer: This factor analyzes the duration of the relationship between the worker and the employer. Relationships for a specific duration or of a sporadic nature suggest an independent contractor relationship. Relationships of an indefinite duration indicate an employment relationship.
  5. Whether the Work is Part of an Integrated Unit of Production: This factor analyzes whether the worker's position is part of an integrated unit of production. If the tasks performed by the worker are segregated from the employer's production process, an independent contractor relationship is indicated. But if the worker's tasks are an integral part of a broader production process, an employment relationship is indicated.

The DOL emphasized that the above factors are not exhaustive and no single factor is dispositive. However, the regulations expressly provide that the first two factors are the most probative and carry more weight than the remaining factors. In the event that the first two factors align and suggest the same classification, then there is a "substantial likelihood" that the classification is correct notwithstanding the remaining factors.

Next Steps

The Federal Register published these regulations on Sept. 25, 2020. The regulations are subject to a 30-day comment period, which expires on Oct. 26, 2020.

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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