The U.S. Department of Labor Proposes a New Economic Reality Test to Determine When Workers Classify As Independent Contractors or Employees
The Wage and Hour Division of the U.S. Department of Labor (“DOL”) proposed a new rule, amending the Fair Labor Standards Act (“FLSA”) to make it easier to determine whether workers are independent contractors or employees and covered under federal minimum wage and overtime laws.FN1 Generally, the new rule seeks to establish that independent contractors must be in business for themselves and must not be economically dependent on the employer for work.FN2 The proposed rule provides for a new “economic reality” test, which provides five factors employers and courts to consider in their determination of economic dependence.
The first two factors are considered “core factors” and are given greater weight than the remaining three. These core factors are: (1) would be given to 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.FN3 The three additional factors provided to aid the analysis, depending on the circumstances, are (3) the amount of skill required in the work, (4) the degree of permanence in the work relationship, and (5) whether the work is part of an integrated unit of production.FN4
Under the proposed rule, workers who exercise more control over their schedule, project selection, the ability to work for potential competitors and the opportunity to earn profits or incur loses based on their own skill or business judgment are more likely to be independent contractors. FN5. Workers who lack control, rely on the employer to equip them with the necessary skills or training necessary to perform the job, and the more integrated their work is in the employer’s production process for a good or service are more likely to be classified as employees.FN6 The rule clarifies, however, that actual practices carry more weight in determining economic dependence than factors that might be contractually or theoretically possible.FN7
Takeaway
The proposed rule would make it easier for companies to classify workers as independent contractors, excluding them from overtime and other provisions under the FLSA. We anticipate that a new rule will be adopted within the next several months and likely before January 2021. Employers wishing to comment on the DOL’s proposed rule will have a 30-day period to do so once the rule is published in the Federal Register. Please contact the attorneys at Campbell Litigation, P.C. for questions regarding employee classification or comment submission guidance.
Footnotes:
FN1: 29 CFR § 795.100-110 (proposed)
FN2: § 795.105(d) - Economic Reality Test
FN3: § 795.105(d)(1) – Core Factors
FN4: § 795.105(d)(2) – Remaining Factors
FN5: See § 795.105(d)(1)
FN6: See § 795.105(d)(2)
FN7: § 795.110.