The question of whether a worker is an employee or independent contractor has long been a thorn in employers’ sides. With the Department of Labor’s (“DOL”) recent announcement of a proposed rule change, there may be some relief on the horizon. The proposed rule issued by the DOL on September 22, 2020, seeks to further clarify the tests for determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (“FLSA”), with the former being subject to the FLSA’s minimum wage and overtime regulations, while the latter is not. The proposed rule will be open for written comments for thirty (30) days after it is published in the Federal Register before it can be considered for final adoption. The hope is that the proposed rule will promote certainty for stakeholders, reduce litigation and encourage innovation by making it easier to classify workers as independent contractors.
The proposed rule restates the “economic reality” test. In doing so, the test evaluates whether the worker is in business for himself/herself or whether the worker is economically dependent on the business entity for work. Five factors are used in this analysis with the first two being core inquiries under the proposed rule. The factors are:
- The nature and degree the worker controls the work – setting own schedule, selecting assignments, little or no supervision, ability to work for others (note that meeting legal health/safety requirements, carrying insurance, and satisfying deadline and quality standards do not amount to “control” for purposes of making the relationship one of employer/employee).
- The worker’s opportunity for profit or loss – worker’s personal initiative and investment in the work.
- The amount of skill required – does the position require specialized skill or training which the business entity does not provide?
- The degree of permanence of the working relationship – definite in duration or sporadic versus indefinite or continuous, with definite or sporadic indicating an independent contractor relationship.
- Whether the work is part of an integrated unit of production – is the work part of a process that results in a unified outcome? Is the worker performing the same tasks or working on a team with employees to complete a job?
In applying these factors, the DOL has indicated that the first two are key, meaning if they point in the direction of either independent contractor or employee, that finding will likely outweigh the other factors. Ideally, the proposed rule will be finalized in the near future, giving business entities some much needed clarity in the independent contractor/employee analysis. As business entities weed through these issues, our Employment and Labor Team is ready to assist.
This article provides an overview and summary of the matters described therein. It is not intended to be and should not be construed as legal advice on the particular subject.