Last week, the U.S. Department of Labor introduced a proposed rule to update its test for determining whether a worker is an employee under the Fair Labor Standards Act (the “FLSA”). If implemented, the proposed rule would likely make it more difficult for employers to classify workers as independent contractors.
The proposed new test would rescind the independent contractor test that was adopted by the DOL in the waning hours of the Trump Administration. That test emphasized two core factors for determining whether a worker was an independent contractor: a worker’s control over their work, and the worker’s opportunity for profit and loss.
Under the new proposed rule, the DOL would return to a “totality of the circumstances” analysis to evaluate the economic realities of the relationship between a worker and a company. For many employers, that rule is about as clear as mud. Explaining the rationale for its new proposed rule, the DOL stressed that independent contractors are those workers who are not economically dependent on their employer for work and are in business for themselves.
To determine economic dependence, the proposed rule puts forth a six-factor test. According to the DOL, these factors are simply “tools” or “guides” to evaluate the totality of the circumstances, and the outcome – i.e., whether a worker is properly classified as an employee or an independent contractor – doesn’t depend on one isolated factor, but instead hinges on the larger picture to determine whether the worker is economically dependent.
The six factors are as follows:
- Opportunity for profit or loss depending on managerial skill. This factor considers whether the worker exercises managerial skill that affects the economic success or failure in performing the work. For example, if the worker can negotiate a higher rate for the work, can accept or decline certain jobs, or can engage in marketing efforts to secure more business, then they may be an independent contractor.
- Investments by the worker and the employer. Under this factor, the DOL posits that a worker’s investments should be such that they support an independent business or serve a business-like function for this factor to weigh in favor of an independent contractor status.
- Degree of permanence of the work relationship. If the work relationship is indefinite in nature, this factor will weigh in favor of employee status. On the other hand, if the relationship is for a definite time period, non-exclusive, project-based, or sporadic due to the worker marketing their work to other entities, this factor may weigh in favor of independent contractor status.
- Nature and degree of control. This factor looks at the degree to which an employer controls the performance of the work and the economic aspects of the working relationship. Facts relevant to this inquiry include the extent of control over the worker’s schedule, performance, the worker’s ability to work for others, the imposition of discipline, as well as control over the economic aspects of the job, such as price setting and marketing or products or services provided by the worker. More control by the employer would tend to indicate employee status, whereas more control by the worker would tend to favor independent contractor status.
- Extent to which the work performance is an integral part of the employer’s business. This factor examines whether the function the worker performs is an integral part of the business. If the function is critical, necessary, or central to the business, the factor will weigh in favor of employee status.
- Skill and initiative. This factor looks at whether the worker has some specialized skill that may contribute to the “business-like initiative.” If the worker brings specialized skills to the work relationship, use of those skills in connection with business-like initiative may indicate independent contractor status.
Finally, the DOL notes that there may be additional factors that are relevant to evaluating whether a worker is economically dependent on an employer for the purposes of determining if they are an employee under the FLSA.
This proposed rule is likely to make it much more difficult for a worker to be properly classified as an independent contractor. As a result, employers should take a hard look now at any independent contractor relationships to evaluate whether adjustments need to be made to the relationship or the worker’s classification. For any questions about these issues, contact any member of the McNees Labor & Employment Group.