On September 22, 2020, the US Department of Labor proposed a new rule to clarify whether a worker will be classified as an independent contractor or an employee under the Fair Labor Standards Act (“FLSA”). The proposed rule will be available for review and public comments for 30 days after it is published in the Federal Register.
The proposed rule adopts an “economic reality” test to determine a worker’s status. That test focuses on whether a worker is economically dependent upon an employer for work or is truly in business for themselves . Economic dependence is the ultimate inquiry. In applying this test, the two most important factors are:
- Who exercises substantial control over key aspects of work performance? Where the worker sets their own schedule, selects projects, and retains the ability to work for an employer’s competitors, this factor will weigh in favor of independent contractor status. In contrast, where the employer sets the schedule, controls the workload, and requires the worker to perform work exclusively for that employer, this factor will weigh in favor of employee status.
- Does the worker have an opportunity for profit or loss (i.e. an ability to affect their earnings by the exercise of their own management and initiative)? If the worker can earn more or lose profits based upon their own managerial skills or business acumen, for example by hiring helpers or choosing particular equipment or materials, this factor will weigh in favor of independent contract status. If the worker is unable to affect their earnings or is only able to do so by working more hours or working more efficiently, this factor will weigh in favor of employee status.
Other factors to be considered in assessing independent contractor vs. employee status under the FLSA include the amount of skill required for the work, the permanence of the working relationship between the parties, and whether the work performed by the individual is a component of the employer’s integrated production process for a good or service.
The DOL’s proposed rule emphasizes that the parties’ actual practice is key to the assessment of independent contractor status. What the parties state in a contract or what may be theoretically possible under a work arrangement is of little relevance if it differs from the reality of their working relationship.
Employers should keep in mind that many states have adopted their own tests for independent contractor status under their respective state wage and hour laws; these tests can differ from state-to-state. The tests may also vary based upon the state law issue being addressed, i.e. unemployment compensation eligibility, workers’ compensation coverage, employment tax liability, etc.
The issue of independent contractor versus employee status continues to challenge employers across all sectors throughout the U.S. We will continue to closely monitor the DOL’s proposed rule and other state-based developments in this area. In the meantime, it might be a good time to review your independent contractor agreements and work relationships within your organization. Your partners at Lake Effect HR & Law can help you ensure compliance while retaining the flexible and dynamic workforce that your organization needs. Contact us at firstname.lastname@example.org or 1-844-333-5253.