Whaddaya Call It? DOL Proposes New Independent Contractor Test

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Soda or pop? Pill bug or roly poly? What you call things depends on where you live. In 2014, the New York Times published this 25-question dialect quiz that will tell you, with startling accuracy, where you or your parents are from.

The test is fun, and you can see how words and dialects vary from region to region.

But some things should not vary from region to region — federal laws.

The Fair Labor Standards Act (FLSA) has one definition of “employ,” but when it comes to deciding who is an employee and who is an independent contractor, different courts in different states apply different standards.  The DOL is trying to fix that.

Under a proposed new rule, released on September 22, the same test would be used in all parts of the country, regardless of whether you call your lunch sandwich a hoagie, sub, or grinder.

It’s Still an Economic Realities Test

Independent contractor or employee? Everyone agrees that under the FLSA, you answer that question using an Economic Realities Test. That test asks whether, as a matter of economic reality, the worker is economically dependent on the potential employer to earn a living. But no one seems to agree on how that’s determined.

Different federal courts use different factors and weigh them differently. The DOL Fact Sheet #13 lists seven factors. Other courts list six. Others list five. Some courts combine factors, and other courts change the meaning of the factors, sometimes in ways that are significant.

The DOL is proposing consistency. There’s one federal law. It should have one meaning.

The Proposed Rule

Under the proposed rule, there would be two “core factors” and if both point in the same direction, the issue is generally decided. If the core factors point in different directions, three “other factors” should be considered.

Core Factors

The core factors are:

  • The nature and degree of the individual’s control over the work; and
  • The individual’s opportunity for profit or loss.

The control factor supports independent contractor status if the worker “exercises substantial control over key aspects of the work,” including setting schedules, selecting projects, and being allowed to work for others.

The profit or loss factor weighs in favor of independent contractor status if the worker has the opportunity to earn profits or incur losses based on the exercise of initiative, managerial skill, business acumen or judgment, or based on management of his or her own investments or capital expenditures. Example of investments may include hiring helpers or buying equipment.

Other Factors

If the two core factors do not determine the issue, the DOL would invite consideration of three other factors:

  • Amount of skill required for the work;
  • Degree of permanence of the working relationship between the individual and the potential employer; and
  • Whether the work is part of an integrated unit of production.

Amount of skill required. This factor weighs in favor of independent contractor status if the work requires specialized skill or training that the potential employer does not provide.

Degree of permanence.  This factor weighs in favor of independent contractor status if the work is definite in duration or sporadic. This factor supports employee status if the work is indefinite. Work that is seasonal by nature does not weigh in favor of independent contractor status, even though it’s definite in duration.

Whether the work is part of an integrated unit of production.  This factor is likely to receive the heaviest criticism. The “integrated unit of production” factor comes from a pair of 1947 U.S. Supreme Court cases. Over the years, this factor has morphed into the question of whether the work is “integral” to the potential employer’s business. The DOL takes a firm stance here, saying that — based on the 1947 Supreme Court decisions — the relevant question is whether the work is “integrated,” not whether it is “integral.”

This factor weighs in favor of independent contractor status if the work is “segregable” from the potential employer’s processes for a good or service. For example, a production line is an integrated process for creating a good. A software development program may require an integrated process for creating a computer program. Work that is performed outside of an integrated unit of production is more likely performed by an independent contractor.

Next Steps

The proposed rule now enters a 30-day period for the public to submit comments. The DOL can extend that period, in its discretion. The DOL will then review the comments and determine its next move. The DOL may enact the rule as written, may modify it based on comments and suggestions, or may decline to implement any new rule.

If I were a gambling man, I’d place my bets on a new rule being issued between Election Day and Inauguration Day, regardless of who wins the election. This will be on a fast track.

How Would This Affect Other Employee Tests? 

It wouldn’t affect the test for any other laws. If adopted, the rule would clarify how to determine whether someone is an employee or an independent contractor under the FLSA only.

The proposed rule would not change the Independent Contractor vs. Employee test under federal tax law, employee benefits law, anti-discrimination law, or any state law. If this new rule is implemented, we’ll still have different tests for different laws, but at least maybe the FLSA test would be the same across the country.

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