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Employee or Independent Contractor? The Department of Labor Comes Down to the Wire Employee or Independent Contractor? The Department of Labor Comes Down to the Wire

Employee or Independent Contractor? The Department of Labor Comes Down to the Wire

On September 22, 2020, the U.S. Department of Labor (“DOL”) announced a “proposed rule” regarding the seemingly age-old question of independent contractor versus employee under the Fair Labor Standards Act (“FLSA”). This is very timely, as the DOL’s policy position under the current administration leans distinctly in the pro-employer camp, and the DOL needs to act in the event of a new administration in Washington this coming January. Even more timely is the rise in the gig economy over the past several years. Gig work has led to many legal disputes about classifications, the likes of which Uber, Lyft, and DoorDash are embroiled in right now in California. The number of businesses that rely on gig workers is also likely to grow rather than shrink whenever we emerge from this global crisis. Having some easy to follow rules are certainly welcome.   

The new rule right now is in the “proposed” stage, as before it can become an effective part of the Code of Federal Regulations, the DOL has to publish the rule and invite comments. If you are so inclined, you can actually read all 40 pages in the Federal Register

This new rule provides clarity about the “economic reality” test. This economic reality test—the one utilized by the DOL—determines whether a worker is truly acting independently or is still under the economic dependency of the employer for work.[1] The DOL makes it clear that the determination is really based upon this, stating “[e]conomic dependence” is the “ultimate inquiry.”

This new rule goes on to break down the economic reality test into two “core factors” that are intended to be given greater weight than the non-core factors. This is the case even though none of the factors are intended to be exhaustive and no single one is determinative. 

The first core factor is the nature and degree of the individual’s control over the work. The more the worker makes that determination, the more likely the worker is an independent contractor. For example, can the worker direct the performance of the work, set his or her own schedule, select the projects he or she wants to do and/or through the ability to work for others, which might include the potential employer’s competitors? Conversely, this factor weighs in favor of the individual being an employee when the employer exercises this control. Further, just because a worker has to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships), it does not constitute the type of control that makes the individual more or less likely to be an employee.

The second core factor is the individual’s opportunity for profit or loss based on the worker’s own initiative and/or investment. If the worker can become more efficient, utilize more technology, hire competent employees, and just use good business judgment to make more money, then the factor weighs toward an independent contractor. The worker does not need to have an opportunity for profit or loss based on both initiative and investment for this factor to support being an independent contractor. This factor weighs toward being an employee to the extent the individual is unable to affect his or her earnings or is only able to do so by working more hours or more efficiently.

According to the new rule, if both core factors point in the same direction, you will likely have your answer. However, if the analysis is still not clear, move on to consider the other non-core factors:
 
  1. The amount of skill required for the work;
  2. The degree of permanence of the working relationship between the individual and the potential employer; and
  3. Whether the work is part of an integrated unit of production. 
 
The first non-core factor, the amount of skill required for the work, weighs in favor of the individual being an independent contractor to the extent the work requires specialized training or skill the potential employer does not provide. This factor weighs in favor of the individual being an employee to the extent the work at issue requires no specialized training or skill and/or the individual is dependent upon the potential employer to equip him or her with any skills or training necessary to perform the job. 

The second non-core factor, the degree of permanence of the working relationship between the individual and the potential employer, weighs in favor of the worker being an independent contractor to the extent the work relationship is by design for a definite period or it is sporadic, which may include regularly occurring fixed periods of work. However, seasonal work by itself would not necessarily indicate independent contractor classification. This factor weighs in favor of the individual being an employee to the extent the work relationship is indefinite in duration (i.e., “at-will”) or continuous or ongoing.

The final non-core factor, whether the work is part of an integrated unit of production, weighs in favor of the individual being an employee to the extent the work is a component of the employer’s integrated process to produce the employer’s goods or services. This factor weighs in favor of an individual being an independent contractor to the extent his or her work is separate from the employer’s production process. Note, the DOL states that this factor is different from the concept of the importance or centrality of the individual’s work to the business. For example, having your IT systems run smoothly is very important and especially important to a remote workforce; however, an IT consultant hired to set up and keep a system running may not have anything to do with the core nature of the business.

The DOL also admonishes that the actual practice between the parties is more relevant when doing this analysis than whatever the parties may say in a contract or what may, in theory, be possible. For example, if an employer “contracts” with independent contractors but conditions the nature and volume of work such that the worker can never work for another, it may be an independent contractor relationship only “in theory.”

The DOL will accept comments on all aspects of the new rule. The rule may be tweaked based upon these comments. Comments can be submitted through regulations.gov through October 22, 2020. 

Of course, as it seems to be a sport these days, there will likely be a lawsuit seeking to challenge this rule. The DOL seemed to think so too and inserted a section of the rule that preserves as much of it as possible in the event a court invalidates a portion of it. 

Every employer needs to pay attention to classifying workers properly. When in doubt, don’t chance it—especially if the classification affects dozens or hundreds of workers. In the meantime, let’s all watch this new rule work its way through the administrative process and see if the DOL can get it in under the wire.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
 
[1] This is not to be confused with the test used by the IRS—not the defunct 20-Question Test—but the common law “right to control” test. It’s too bad the federal agencies can’t adopt a single test. Which test you use all depends on who is asking. 
 
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