DOL Issues Long Awaited Proposed Rule on Independent Contractors
DOL Issues Long Awaited Proposed Rule on Independent Contractors
The misclassification of employees as independent contractors is one of the most serious problems facing affected employees, employers, and the U.S. economy. The U.S. Department of Labor (“DOL”) has issued a proposed rule to clarify who is an independent contractor under the federal Fair Labor Standards Act (“FLSA”). This action finalizes the DOL’s proposal to withdraw the prior rule.
The new rule would replace the generally employer-friendly test announced by the DOL in January 2021 and instead directs employers to include whether the employee works exclusively for that employer, but it acknowledges that simply having multiple jobs does not weigh in favor of independent contractor status.
The regulation begins by framing the ultimate question that, in the DOL’s view, separates employees from independent contractors: is the worker, as a matter of economic reality, “economically dependent on the employer for work, or is the worker in business for themselves. The DOL uses six-factors to determine employee status:
- 1. Worker’s opportunity for profit or loss depending on managerial skill.
This factor considers whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work, examining, among other things: whether the worker determines or can meaningfully negotiate the charge or pay for the work provided; whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space. If a worker has no opportunity for a profit or loss, then this factor suggests that the worker is an employee;
- 2. Investments by the worker and the employer.
This factor examines whether a worker’s investment is “capital or entrepreneurial in nature,” and notes that costs borne by a worker to perform a job, such as tools and equipment, are not capital and entrepreneurial, and instead indicate employee status. Additionally, the proposed rule provides that a worker’s investment should be considered on a relative basis with the employer’s investment in its overall business;
- 3. The degree of permanence of the work relationship.
This factor examines whether a work relationship is indefinite in duration or continuous, which suggests employee status, or whether the relationship is definite in duration, non-exclusive, project-based, or sporadic, thus indicating independent contractor status;
- 4. Nature and degree of control.
This factor considers the employer’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship. Facts relevant to the employer’s control over the worker include whether the employer sets the worker’s schedule, supervises the performance of the work, or explicitly limits the worker’s ability to work for others. Additionally, facts relevant to the employer’s control over the worker include whether the employer uses technological means of supervision (such as by means of a device or electronically), reserves the right to supervise or discipline workers, or places demands on workers’ time that do not allow them to work for others or work when they choose. Whether the employer controls economic aspects of the working relationship should also be considered, including control over prices or rates for services and the marketing of the services or products provided by the worker. Control implemented by the employer for purposes of complying with legal obligations, safety standards, or contractual or customer service standards may be indicative of control. More indicia of control by the employer favors employee status; more indicia of control by the worker favors independent contractor status;
- 5. The extent to which the work performed is an integral part of the employer’s business.
This factor considers whether the work performed is an integral part of the employer’s business. It does not examine whether any individual worker in particular is an integral part of the business, but rather whether the function they perform is an integral part. This factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the employer’s principal business. This factor weighs in favor of the worker being an independent contractor when the work they perform is not critical, necessary, or central to the employer’s principal business; and
- 6. Skill and initiative.
This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. Employee status is indicated where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the employer to perform the work. Where the worker brings specialized skills to the work relationship, it is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.
The DOL then includes a catch-all provision stating that additional factors may be relevant “if the factors in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the employer for work.”
Although it may seem the proposed rulemaking is pro-employee, there is some good news for the companies who use independent contractors, the DOL agreed that it did not have the authority to on the federal level to adopt an ABC test (like California uses now) for use with FLSA claims, which would have been devastating to businesses who use the independent contractor model. In order for a worker to be an independent contractor, the ABC test requires the employer to prove that:
- •The worker is free from the control and direction of the hiring entity;
- •The worker performs work that is outside the usual course of the hiring entity’s business; and
- •The worker is customarily engaged in an independently established trade, occupation, or business.
Let’s face it, a lot of workers will be classified by the DOL as employees instead of independent contractors. And because independent contractors are generally not paid a salary, and because a salary is usually a prerequisite for exemption from overtime rules, many workers who are reclassified will be entitled to overtime, no matter how much money they otherwise make. That’s a prescription for a bucket full of lawsuits.
Here at Epps and Coulson, LLP we know these changes being proposed by the Department of Labor are confusing. Please feel free to contact dawn at: firstname.lastname@example.org for any questions.
Information contained in this Memo is intended for informational and educational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney. It is likely considered advertising. Epps & Coulson, LLP encourages you to call to discuss these matters as they apply to you or your business.