To Be (An Employee) Or Not To Be (An Employee)? That Is The $64,000 Question.

Constangy, Brooks, Smith & Prophete, LLP
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Constangy, Brooks, Smith & Prophete, LLP

With a shout-out to Shakespeare and a TV quiz show that ran in the mid-1950s and ended in scandal, this is a question that any business using independent contractors needs to answer. When adjusted for inflation and the modern-day frenzy of class action litigation, the answer could be closer to the Six Million Dollar Man. Although a proposed rule from the U.S. Department of Labor is intended to simplify the determination under the Fair Labor Standards Act, its uncertain future and fundamental conflict with certain state laws dictates that companies proceed with caution.

On September 22, the DOL issued a 159-page proposal to amend its rules for determining, under the FLSA, whether an individual is dependent on a business for work (and, thus, an employee) or is in business for himself or herself (and, thus, an independent contractor).

The proposal identifies five factors for determining whether an individual is an employee or independent contractor: (1) the nature and degree of the individual’s control over the work; (2) the individual’s opportunity for profit or loss; (3) the amount of skill required to perform the work; (4) the degree of permanence in the relationship between the individual and the potential employer; and (5) whether the work performed by the individual is part of an integrated unit of production. But, according to the proposal, if the first and second factors both point toward either “employee” or “independent contractor” status, the analysis is likely to be complete and will not be affected by the remaining three factors.

This dual factor test, with three subsidiary “tie-breaker” factors, could be viewed as a substantial departure from the multi-factor, “totality of the circumstances” tests applied by various federal courts. It also shifts the focus from looking at the degree of control exercised by a business over an individual, to the degree of control exercised by the individual over things like when to work and for how long.

Finally, it stands in stark contrast to more restrictive state laws. For example, California recently enacted a law establishing that an individual is presumed to be an employee unless a company can prove that the individual (1) operates autonomously; (2) performs work that is not the alleged employer’s main business; and (3) regularly and independently engages in the work that he or she was hired to perform.

In today’s service-oriented, knowledge-driven economy, the contrast between the DOL’s proposed rule, the current law in California, and the various tests currently applied by federal courts, could not be more striking. For example, individuals who perform work for a ride-hailing/ride-delivery company may well control when they work, how much they work, and how much profit or loss they make. As a result, they would probably be considered independent contractors under the DOL’s proposed rule. But, under California law, those same individuals are likely to be deemed employees because they (1) probably do not operate autonomously, (2) certainly would be performing work that is the employer’s main business, and (3) probably would not otherwise be engaged in the work they were hired to perform. In between these extremes, the outcome under the various tests applied by the federal courts would be determined on a case-by-case basis.

The DOL’s proposed rule would provide employers with much-needed clarity and relief with respect to the classification of individuals as independent contractors under the FLSA. However, it faces an uncertain future. First, if Vice President Joe Biden wins the Presidency before the rule takes effect, he could rescind it. If the Democrats take control of the Senate, retain their majority in the House, and the rule has yet to take effect, they could invalidate it by legislation. Even if neither happens, the rule is likely to face court challenges and arguments that courts should not give it any deference. And, even if all the chips fall into place for business, it will not alter the obligation to comply with more restrictive state laws.

All of that said, if the rule makes it through this game of Survivor: The DC Gantlet, it will provide employers with a potent argument in responding to FLSA lawsuits challenging the classification of individuals as independent contractors.

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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