Is a Worker an Employee or Independent Contractor? DOL Proposes New Rule

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For many years, construction companies have been faced with the issue of whether they should treat a worker as an employee or independent contractor. Handling the issue incorrectly can have serious consequences. Various courts and regulatory bodies have enforced different standards over the years causing much confusion for construction companies and other employers and risk due to misclassification.

Department of Labor Announces Proposed Rule

On September 22, the Department of Labor announced its proposed rule addressing how to determine whether a worker is an employee under the Fair Labor Standards Act (FLSA) or an independent contractor. Most believe the new rule will provide greater clarity for construction companies and other employers faced with this issue.

In its press release, the DOL stated:

“The Department’s proposal aims to bring clarity and consistency to the determination of who’s an independent contractor under the Fair Labor Standards Act,” said Secretary of Labor Eugene Scalia. “Once finalized, it will make it easier to identify employees covered by the Act, while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.”

“The rule we proposed today continues our work to simplify the compliance landscape for businesses and to improve conditions for workers,” said Wage and Hour Division Administrator Cheryl Stanton. “The Department believes that streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility.”

What’s Changing

The proposed rule:

Adopts an “economic reality” test

The test considers whether a worker is in business for himself or herself (independent contractor) or is economically dependent on a putative employer for work (employee).

Identifies and explains 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

These factors help determine if a worker is economically dependent on someone else’s business or is in business for himself or herself.

Identifies three other factors that may serve as additional guideposts in the analysis:
  1. The amount of skill required for the work
  2. The degree of permanence of the working relationship between the worker and the potential employer
  3. Whether the work is part of an integrated unit of production

Advises that the actual practice is more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.

Public Comment and What’s Next

The proposed rule is published on the Federal Register and is available for public comment until October 26, 2020. Employers are encouraged to offer their feedback on the proposal.

Big Picture

Construction companies and other employers should continue to stay up to date on the latest rules and standards pursuant to Iowa and federal law and seek counsel when questions arise. Misclassification of status is a significant risk for employers, and any questions should be directed to your legal counsel.

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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