DOL proposes new rule defining independent contractors vs. employees under the FLSA

By Lillian Hartgrove, State Board of Education Chairman
Special to the UCBJ

On Sept. 22, 2020, the U. S. Department of Labor (DOL) announced a proposed rule addressing how to determine whether a worker is an employee under the Fair Labor Standards Act (FLSA) or an independent contractor.  

The FLSA requires covered employers to pay their nonexempt employees at least the federal minimum wage for every hour worked, and overtime pay for every hour worked over 40 in a workweek – and mandates that employers keep certain records regarding their employees.  A worker who performs services for an employer as an independent contractor, however, is not an employee under the Act.  Thus, the FLSA does not require an employer to pay an independent contractor either the minimum wage or overtime pay, nor does it require that an employer keep records regarding that independent contractor. This difference makes it critical that an employer understands the criteria to be used in determining whether a worker is an employee or an independent contractor.

The FLSA does not precisely define who is an employee.  Until now, the DOL has relied on the courts, industry-specific regulations, fact-specific opinion letters and a fact sheet to offer tests to be applied in making a determination on the status of a worker.  Federal appellate courts have differed on what factors to use when testing whether a worker is an independent contractor or an employee, and on how to weigh and apply those factors.  The Sixth Circuit, which covers Tennessee and Kentucky as well as other states, has used a six-factor test which considered the permanency of the relationship, the degree of skill required for rendering the services, the worker’s investment in equipment or materials, the worker’s opportunity for profit or loss, the degree of the alleged employer’s right to control the manner in which the work is performed, and whether the service rendered is an integral part of the alleged employer’s business.  No single factor has been determinative.

The DOL’s proposed regulation, thus, for the first time, sets a proposed rule to interpret the FLSA on this issue and provide broad agency-backed definitions.  The proposed rule adds a new 29 CFR Part 795 to delineate these definitions.  The DOL also proposes to strike previous industry-specific interpretations set forth in 29 CFR 780.330(b) and 778.16(a) and replace them with cross-references to the interpretation set forth in the proposed rule.  The regulations addressing independent contractor status under the Migrant and Seasonal Agricultural Worker Protection Act are not being revised.

The DOL proposes that the central inquiry as to whether an individual is an employee or an independent contractor under the FLSA is “whether, as a matter of economic reality, the individual is economically dependent on the potential employer for work.”  In other words, the key question is whether workers are more closely akin to wage earners who depend on others to provide work opportunities or entrepreneurs who create work opportunities for themselves.  A further relevant question is whether the worker providing a certain service to a potential employer is an entrepreneur in that line of business.  

The DOL’s proposed rule explicitly gives two “core factors” more weight than all others:

  • The nature and degree of an individual’s control over the work; and
  • The individual’s opportunity for profit or loss.

Examples in the proposed regulatory text of an individual’s substantial control include setting his or her own work schedule, choosing assignments, working with little or no supervision, and being able to work for others, including a potential employer’s competitors.

In discussing the opportunity for profit or loss, the proposed regulations examine the worker’s economic investment as part of the equation.  This factor would weigh towards an individual being an employee to the extent the individual is unable to affect his or her earnings through initiative or investment or is only able to do so by working more hours or more efficiently.

Proposed §795.104(c) explains that the two core factors are each afforded more weight in the analysis of economic dependence than are any other factors.  If both core factors point towards the same classification, their combined weight is substantially likely to outweigh the combined weight of other factors that may point towards the opposite classification.  In other words, where the two core factors align, the bulk of the analysis complete. At the same time, if the two core factors do not point toward the same classification, the remaining enumerated factors will usually determine the correct classification.

The proposed regulations delineate three other factors to consider:

  • The amount of skill required for the work;
  • The degree of permanence of the working relationship between the individual and the potential employer; and
  • Whether the work is part of an integrated unit of production.

The “skill required” factor weighs in favor of classification as an independent contractor where the work at issue requires specialized training or skill that the potential employer does not provide.  Otherwise, it weighs in favor of classification as an employee.

The “degree of permanence” factor would weigh in favor of an individual being classified as an independent contractor where his or her working relationship with the potential employer is by design definite in duration or sporadic.  In contrast, the factor would weigh in favor classification as an employee where the individual and the potential employer have a working relationship that is by design indefinite in duration or continuous. The DOL notes that the seasonal nature of some jobs does not necessarily suggest an independent contractor classification, especially where the worker’s position is permanent for the duration of the relevant season and where the worker has done the same work for multiple seasons.

The “integrated unit” factor weighs in favor of employee status where a worker is a component of a potential employer’s integrated production process, whether for goods or services.  The preamble to the proposed regulations provides the example of a programmer who works on a software development team as being more likely to be an employee.  Another example of employee classification would be where an individual works closely alongside employees and performs identical work, or work closely interrelated with those employees.  Conversely, where an individual service provider can perform his or her duties without depending on the potential employer’s production process, the factor would favor classification as an independent contractor. 

As noted above, it may not be necessary to spend much time analyzing these last three factors if both of the first two factors (the nature and degree of a worker’s control over his or her work and the individual’s opportunity for profit and loss) point to the same classification.

It is important to remember that at this point in time these are only “proposed” regulations.  Further review and administrative steps must be completed before a final regulation can be issued.  

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