U.S. Department of Labor Proposes Rule to Clarify Independent Contractor Status

On September 22, 2020, the U.S. Department of Labor announced a proposed rule, with the intention of clarifying the definition of “employee” under the federal Fair Labor Standards Act (FLSA) as it relates to independent contractors.  If adopted, the rule would make it easier for employers to classify workers as independent contractors under the FLSA.

What Change Would the Rule Bring?

The U.S. Department of Labor (DOL)’s proposed new rule would:

  • Adopt an “economic reality” test to determine whether a worker is an employee or an independent contractor under the FLSA. That is, whether a worker is economically dependent on an entity for work and would be an employee, or conversely, whether the individual is in business for him/herself (independent contractor);
  • Identify and explain two “core economic reality factors,” specifically the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on initiative and/or investment. The DOL would weigh these two factors more heavily than any others to help determine if a worker is economically dependent on an entity’s business or is in business for themselves. The DOL believes that taking this approach will likely encourage the creation of independent contractor jobs that provide autonomy and satisfying entrepreneurial opportunities;
  • Identify three other factors that the DOL will consider: 1) amount of skill required for the work; 2) degree of permanence of the working relationship between the worker and the potential employer (the more permanent, the more likely there is an employee status); and 3) whether the work is part of an integrated unit of production and if so, that would weigh in favor of finding employee status (meaning where a worker is a component of a potential employer’s integrated production process that “requires the coordinated function of interdependent subparts working toward a specific unified purpose.” For instance, if a worker depends on the overall process to perform work duties as would a computer programmer on a software development team, that person would be more likely to be classified as an employee.
  • Advise that the actual practice of what the parties are doing is more relevant to determining whether the worker is an independent contractor or an employee than what may be contractually or theoretically possible.

What Should Employers Do Now?

Nonprofit organizations and businesses have an opportunity to provide public comment on the proposed rule until October 26, 2020.  Even if the final rule is substantially unchanged from the proposed rule, organizations should remain mindful that their respective State Departments of Labor and court rulings relating to State labor laws and wage orders may impose stricter definitions or interpretations of “independent contractor” than under the FLSA.  Therefore, employers should speak with their legal counsel before determining whether a worker is properly classified as an independent contractor rather than an employee to help minimize legal risk.

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