DOL proposes new independent contractor test

The Department of Labor has published a proposed rule that would change the test for determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA)

Background:

The Department of Labor (DOL) uses an "economic realities" test to determine whether workers are covered by the FLSA and entitled to minimum wage, overtime, and other wage and hour rules. Currently, this test looks at the following factors, each carrying equal weight:

1. The extent to which the services rendered are an integral part of the principal's business.
2. The permanency of the relationship.
3. The amount of the alleged contractor's investment in facilities and equipment.
4. The nature and degree of control by the principal.
5. The alleged contractor's opportunities for profit and loss.
6. The amount of initiative, judgment, or foresight in open market competition with others required for the contractor's success.
7. The degree of independent business organization and operation.

Note: Different tests are used under other laws, and some states have their own independent contractor tests.

Proposed Rule:

The proposed rule would define and clarify how the economic realities test is applied. Under the proposed rule, the ultimate inquiry is whether, as a matter of economic reality, the worker is dependent on a particular individual, business, or organization for work (and is thus an employee) or is in business for themselves (and is thus an independent contractor). Specifically, the proposed rule would sharpen the test into five distinct factors, including:

• Two "core factors" that would carry more weight in the analysis (covered in more detail below). These two factors are the nature and degree of the worker's control over the work, and the worker's opportunity for profit or loss based on initiative and/or investment;
• Three other factors that would serve as additional guideposts in the analysis: the amount of skill required for the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work is part of an integrated unit of production.

Two Core Factors:

Nature and Degree of Control:

Indication of an independent contractor relationship: This factor would weigh towards the individual being an independent contractor to the extent that the individual, as opposed to the potential employer, exercises substantial control over key aspects of work performance. Examples include:

• Setting their own work schedule
• Choosing assignments
• Working with little or no supervision
• Being able to work for others, including a potential employer's competitors

Indication of an employer/employee relationship: By contrast, the control factor would weigh in favor of classification as an employee to the extent that a potential employer, as opposed to the individual, exercises substantial control over key aspects of the work, including through requirements that the individual work exclusively for the employer during the working relationship or prohibiting the individual from working for others after that relationship ends.

The proposed rule also would clarify that requiring an individual to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships) doesn't constitute control that makes the individual more or less likely to be an employee.

Opportunity for Profit or Loss Based on Initiative/Investment:

This factor would weigh towards the individual being classified as an independent contractor if they have an opportunity for profit or loss based on either or both the:

• Exercise of personal initiative, including managerial skill or business acumen; and/or
• Management of investments in, or capital expenditure on, for example, helpers, equipment, or material.

While the effects of the individual's exercise of initiative and management of investment are both considered under this factor, the individual wouldn't need to have an opportunity for profit or loss based on both for this factor to weigh towards the individual being an independent contractor. This factor would weigh towards the individual being an employee to the extent the individual is unable to affect their earnings through initiative or investment or is only able to do so by working more hours or more efficiently.

Compliance Recommendations:

Once the proposed rule is published in the Federal Register, employers and other members of the public will have 30 days to comment on it. The DOL will then take the comments into consideration as it drafts a final rule. This process typically takes months. Please contact your dedicated service professional with any questions.