Labor Department Announces Proposed Rules for Determining Independent Contractor Status

September 28, 2020Alerts

The Department of Labor, Wage and Hour Division (DOL), on September 25, 2020 issued a proposed rule clarifying how to distinguish between employees and independent contractors under the Fair Labor Standards Act (FLSA).

While the regulations may change prior to final adoption, in their present form the key provisions contained in the proposed rule include:

Independent Contractors Are Not Employees

The proposal explains that employer requirements under the act (regarding minimum wage and overtime pay, as well as recordkeeping requirements) pertain only to employees, and do not extend to independent contractors. 

Adoption of the Economic Reality Test

Because the FLSA does not define the term "independent contractor," the department proposes the present rulemaking in order to clarify the distinction between an employee and an independent contractor. The proposal adopts the economic reality test, which courts have long utilized to determine a worker’s status as an employee or independent contractor under the act. It applies a variation of the traditional multifactor analysis to determine economic dependence, focusing primarily on two core factors:

  1. The nature and degree of the worker’s control over the work
  2. The worker’s opportunity for profit or loss.

Nature and Degree of Worker’s Control

This factor focuses on whether the worker (as opposed to the employer) exercises substantial control over key aspects of the performance of the work. Under this factor, whether a worker is required to comply with specific legal obligations, satisfy health and safety standards, carry insurance, etc., is not relevant to determining whether a working relationship is one of employment or independent contracting.

Opportunity for Profit or Loss

The DOL proposes to adopt the Second Circuit’s approach to this factor, which includes analyzing an individual’s opportunity for profit or loss based on investments. Therefore, this factor weighs towards classification as an independent contractor if the worker has the opportunity for profit or loss based on either or both:

  1. The exercise of personal initiative, including managerial skill or business acumen
  2. The management of investments in, or capital expenditure on, for example, helpers, equipment or material.

Other Factors

Under the proposed regulation, the two “core” factors, noted above, are each afforded more weight in the analysis than the remaining factors. As a result, if both core factors point towards the same classification, their combined weight will likely outweigh the combined weight of the other factors. By contrast, the relevance of the remaining factors varies depending on the circumstances, and the remaining factors are probative when the two core factors do not point in the same direction. The other factors include:

  1. The “skill required” factor
  2. The “permanence of the working relationship” factor
  3. The “integrated unit” factor.

Notably, the proposed regulation clarifies that the skill factor does not include a consideration of initiative, the permanence factor does not include a consideration of exclusivity, and the integrated factor does not include a consideration of the importance of the individual’s work.

Actual Practice

Though the actual practice of the parties involved (the workers and the potential employer) is more relevant than what is contractually or theoretically possible, the department explicitly states that the contractual or theoretical possibilities remain potentially relevant to the analysis.

The department intends for this proposed regulation to be the sole and authoritative interpretation of independent contractor status under the FLSA and to replace the DOL’s previous interpretation of independent contractor status.

The DOL has published the full text of the proposed rule in the Federal Register. Comments may be submitted until October 26, 2020 through either the Federal eRulemaking portal, or by mail to the following address: Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue, N.W., Washington, D.C. 20210.

If you have any questions about the information contained in this alert, please contact Tessa M. Carson at (610) 397-2211 or [email protected], or any member of Fox Rothschild’s Labor & Employment Department.

Additional Information