U.S. Department of Labor Proposes New Test for Independent Contactor Status

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On Sept. 22, 2020, the U.S. Department of Labor (DOL) proposed a new test to determine whether workers are independent contractors or employees under federal law.  According to DOL, the purpose of the change is to make it easier to identify which workers are employees covered by the minimum wage, overtime, and other provisions of the Fair Labor Standards Act (FLSA). The department described the new test as “streamlining and clarifying” the determination of independent contractor versus employee, and said it expects the change will give workers and businesses more certainty about their legal obligations and reduce litigation and associated costs.

DOL proposes to establish the test through a completely new federal regulation. Currently, courts can use various tests and factors to determine independent contractor classification. The agency considers factors most commonly used by federal courts in its analysis, but does not have a definitive test of its own. The proposed new rule would be the DOL’s “sole and authoritative interpretation of independent contractor status under the FLSA,” and would allow the DOL, courts, and businesses to use a common test for the first time. 

The department now considers six and sometimes seven factors aimed at determining whether workers are truly in business for themselves instead of relying on the company for all business, which is referred to as the “economic reality” of the relationship between worker and company – the “Economic Realities” test. The economic reality of the relationship is determined by looking at all of the factors together, without any one of them being decisive either for or against independent contractor status.

DOL’s proposed test will continue to be an economic realities test aimed at ultimately deciding whether workers are in business for themselves or, instead, are economically dependent on the potential employer.  However, it reduces the number of factors considered to five:

  1. The nature and degree of the worker’s control over their work
  2. The worker’s opportunity for profit or loss based on initiative and/or investment
  3. The amount of skill required for the work
  4. The degree of permanence of the working relationship between the worker and the potential employer
  5. Whether the work is part of an integrated unit of production.

As in the past, the actual practice of the relationship is more relevant than what may be stated in a contract between the worker and the potential employer. But a significant change in the new test would be that the first two factors listed above are “core factors” and “afforded greater weight” than the other three, which DOL calls “guideposts” in the analysis. This will help focus the analysis on the most important factors.    

DOL states that the new rule is not more or less permissive of independent contractor status, inferring that there is no intent to allow for more independent contractors. But, the department says this despite numerous references to the rise of the “gig economy,” which typically relies on independent contractors to perform side, temporary, or internet-based work. Additionally, there is a lengthy explanation of why the ABC independent contractor test is not an appropriate test under the FLSA. The ABC test is not used by DOL but is used in some states, including California, where it has caused independent contractor angst in the gig economy including threats from Uber and Lyft to cease operations there. It is a much stricter test under which many traditional independent contractors are re-classified as employees. DOL’s rejection of the ABC test and recognition of the size of the gig economy may signal how it would apply the new test.

The DOL’s proposed rule will soon be published in the Federal Register, which will then begin a 30-day public comment period. After that, the department will consider the comments, and then revise the proposal or implement it as a final rule, and after a short notice period it will become an enforceable federal regulation.

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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