The U.S. Department of Labor (DOL) has proposed new regulations for clarifying whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). Independent contractors, including many gig-economy workers, are not eligible for minimum wage, overtime and other benefits that employees must receive. The proposed rule adopts an "economic reality" test to determine a worker's status as an employee or independent contractor.
The DOL has indicated the proposal is intended to provide clarity and consistency for employers and workers. In addition, streamlining and clarifying the test to identify independent contractors aims to reduce worker misclassification and reduce litigation.
“Once finalized, it will make it easier to identify employees . . . while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.”
Secretary of Department of Labor
“Economic Reality” Test
Status as an employee or independent contractor would be determined by looking to the “economic reality” of the relationship. Specifically, the test distinguishes whether a worker is in business for himself or herself (independent contractor) or is economically dependent on a putative employer for work (employee).
The proposed rule outlines two “core factors” making employment determinations:
- Nature and degree of worker’s control over the work. [more details]
- Opportunity for profit or loss based on the worker’s own initiative, investment, or both. [more details]
Three other factors are identified that may serve as additional guideposts in the analysis, but which are given less weight:
- Skill required for the work
- Permanence of the working relationship between the worker and the potential employer
- Whether the work is part of an integrated unit of production.
Lastly, 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.
There will be a 30-day comment period after the proposed rule's official publication in the Federal Register. Employers should watch carefully as these rules are finalized and plan to review and confirm existing independent contractor relationships and establish clear guidelines for future employment relationships.
More Details on Core Factor #1
This first factor suggests that an individual is an independent contractor to the extent that he or she exercises substantial control over key aspects of the performance of the work. Elements that help define substantial control would include setting their own work schedule, selecting projects, working with little or no supervision, and being able to work for others (including a potential employer’s competitors).
By contrast, the control factor would weigh in favor of a worker being classified as an employee to the extent the employer, rather than the individual, exercises substantial control over key aspects of the work. This would include any requirement that the individual work exclusively for the employer during the working relationship.
Lastly, requiring an individual to comply with specific legal obligations, satisfy health and safety standards, independently carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses would not constitute control that makes the individual more or less likely to be an employee.
More Details on Core Factor #2
The second factor suggests that an individual is an independent contractor if he or she has an opportunity for profit or loss based on either:
- Personal initiative, managerial skill, or business acumen.
- Management of investments in or capital expenditure for the business (for example, helpers, equipment, technology, or materials).