Independent Contractor v. Employee: DOL Proposes Controversial New Rule Under FLSA

September 24, 2020


On September 22, the U.S. Department of Labor Wage and Hour Division (DOL) submitted a Notice of Proposed Rulemaking regarding independent contractor v. employee classification under the Fair Labor Standards Act (FLSA). 

This proposed DOL rule uses the “economic reality” test applied by federal courts to determine whether workers meet the definition of independent contractor, as opposed to employee. The “economic reality” test is a familiar test applied by federal courts under the FLSA to determine a worker’s status as employee or independent contractor. The DOL’s proposed rule narrows the focus to only five factors.  And among the five factors, two must be given the greatest weight: 

1.    The nature and degree of the worker’s control over the work, and 

2.    The worker’s opportunity for profit or loss based on personal initiative or investment. 

The other remaining considerations are: the amount of skill required in the work, degree of permanence in the work relationship, and whether the work is part of an integrated unit of production.  These three factors are to be used as “guideposts” only if the first two factors are in conflict. 
Employee misclassification cases made headlines recently as gig economy workers have challenged businesses like Uber, Lyft, and Instacart. Lawmakers in many states responded by enacting laws expanding employee classification, which were strongly opposed by businesses that employ gig economy workers. The DOL maintains that the proposed new rule seeks to “promote certainty for stakeholders, reduce litigation, and encourage innovation in the economy.” 

Making one of two primary factors the worker’s degree of control is significant.  Under the economic reality test applied by federal courts, the company’s degree of control over the worker is important. But, under the DOL’s proposed rule, the worker’s degree of control is now the question.  For example, drivers for Uber and like service providers arguably have both complete control over when and how much work they do and have opportunity for profit or loss depending on personal initiative or investment.

This DOL proposed rule is expected to be published in the Federal Register in the next few days. Once published, it will be subject to a 30-day comment period before it can be finalized under Executive Order 13771.  

If you have questions about this proposed rule’s impact on your organization’s employee versus independent contractor classifications, please contact a member of our firm’s Labor & Employment Law practice group. 

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