On September 22, 2020, the U.S. Department of Labor (DOL) announced a proposed rule clarifying the definition of employee under the Fair Labor Standards Act (FLSA) as it relates to independent contractors.
“The Department’s proposal aims to bring clarity and consistency to the determination of who’s an independent contractor under the Fair Labor Standards Act,” said Secretary of Labor Eugene Scalia. “Once finalized, it will make it easier to identify employees covered by the Act, while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.”
The DOL’s proposed rule, however, has been sharply criticized as being a more employer friendly interpretation of employee status under the Fair Labor Standards Act than the DOL applied during the Obama administration.
The Department’s proposed rule would:
- Adopt an “economic reality” test to determine a worker’s status as an FLSA employee or an independent contractor. The test considers whether a worker is in business for himself or herself (independent contractor) or is economically dependent on a putative employer for work (employee);
- Identify and explain two “core 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. These factors help determine if a worker is economically dependent on someone else’s business or is in business for himself or herself;
- Identify three other factors that may serve as additional guideposts in the analysis: the amount of skill required for the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work is part of an integrated unit of production; and
- Advise that the actual practice is more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.
The agency proposed giving greater weight to two factors as determinative of status: (1) the nature and degree of the employer’s control over the work and (2) the worker’s opportunity for profit or loss based on personal initiative or investment. The proposed rule contemplates three additional “guideposts,” which would be useful in the analysis when the initial two factors are conflicting, according to a senior DOL official on a media call. The additional criteria are the amount of skill required in the work, the degree of permanence in the work relationship, and whether the work is part of an integrated unit of production.
This Notice of Proposed Rulemaking (NPRM) is available for review and public comment for 30 days after it is published in the Federal Register, which is significantly shorter than the more typical 60 or 90 day period for the public to weigh-in, indicating that the administration is fast-tracking the rule change.
A senior DOL official on the press call acknowledged that federal judges may opt not to give deference to this rule, once finalized, adding, “We do believe that the way we have articulated it is going to be highly persuasive to courts and to businesses and to individuals who want to be independent contractors across the country.”
Unions and Democrats generally favor the contrary approach of expanding employee status, contending that workers are often misclassified as independent contractors, which allows companies to dictate workers’ economic conditions while denying them benefits and basic workplace protections.