Vinson & Elkins LLP

On September 22, 2020, the Department of Labor (“DOL”) released its long anticipated rule for evaluating independent contractor status under the Fair Labor Standards Act (“FLSA”), which provides a simpler framework for how businesses can lawfully classify workers as independent contractors rather than employees.

The proposed rule adopts an “economic reality test” for determining which workers should be classified as independent contractors. The test identifies two “core factors” and three “guidepost” factors. The first core factor looks to the nature and degree of the worker’s control over their work. This factor tilts in the favor of finding independent contractor status where workers exercise significant control over performance of the work, although the DOL clarifies that requiring individuals to comply with safety and health standards or to meet deadlines is not an indicator of employee status. The second core factor looks to whether the worker has an opportunity for profit or loss based on: (1) the exercise of personal initiative, including managerial skill or business acumen; and/or (2) the management of investments, including, for example, expenditures on helpers, equipment, or material.

In issuing the proposed rule, the DOL explained that if both core factors point to the same classification, there is a “substantial likelihood” that the classification is appropriate. If they point in opposite directions, however, the guidepost factors may be relied on to tip the scale in favor of one classification over another. Those three guidepost factors are the amount of skill required in the work, the degree of permanence in the work relationship, and whether the worker is part of an integrated unit of production.

While the proposed rule provides a more employer-friendly standard for determining independent contractor status under the FLSA, employers should consider the following before making significant changes to their employment practices. First, the rule would apply only in the context of the FLSA, and the rule would not alter state laws that apply a stricter test for determining worker status, such as the ABC test codified in California’s Assembly Bill No. 5 (“AB-5”). Second, plaintiffs have successfully challenged some of the DOL’s new rules, resulting in their partial invalidation. Finally, if there is a change in administration after the November elections, the test for determining worker status may be revisited, as Democratic presidential nominee Joe Biden has spoken favorably about applying the test set forth in California’s AB-5.