DOL Publishes Proposed Rule on Independent Contractor Classification

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Morgan LewisWhile 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 US Department of Labor (DOL) published a Notice of Proposed Rulemaking (Proposed Rule) 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 himself or herself or is economically dependent on the potential employer. Comments on the Proposed Rule are due October 26, unless DOL extends the comment period.

DETERMINATIVE FACTORS

The Proposed Rule identifies five non-exhaustive factors that should guide the analysis of whether a worker is an employee or independent contractor. These include two “core factors”: (1) the nature and degree of the worker’s control over the work, and (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 toward 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,[1] 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 initiative or investment, or is only 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 that 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. This factor weighs in favor of classifying a worker as an independent contractor where his or her work is segregable 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 employers 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 30 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 ensuing 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. Morgan Lewis will continue to monitor developments related to the Proposed Rule.

 

[1] The DOL’s proposed inclusion of “initiative” expands the traditional consideration of whether the worker has made an economic investment, for example in equipment and tools.

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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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