Attorney Blog, Human Resources, Payroll, payroll law

DOL Proposes New Rule For Independent Contractor Classification

Attorney Harrison Oldham

On September 22, 2020, the U.S. Department of Labor (“”) unveiled its long-awaited proposed independent contractor rule. The new rule sets forth a new standard for determining whether a worker can be classified as an independent contractor rather than an employee for purposes of the Fair Labor Standards Act (“FLSA”).  The proposed rule will make it easier for employers to classify workers as and otherwise avoid violating the FLSA’s minimum wage, overtime and recordkeeping requirements that apply to employees but not independent contractors.

Currently, under the FLSA, “employees” are subject to certain protections, such as minimum wage and overtime requirements, while “independent contractors” are not.  But neither the FLSA nor current DOL regulations define, as a general rule, what makes a worker an independent contractor, giving rise to a patchwork of tests and rules across states and in federal courts.

In the proposed rule the DOL clarified its approach for applying the “economic reality” test used to determine a worker’s status as an employee or an independent contractor. According to the DOL 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 him – or herself (and is thus an independent contractor).”

The proposed rule creates a five-factor test to determine whether a worker is an independent contractor for FLSA purposes.  Those factors are:

  • The Nature and Degree of the Worker’s Control Over the Work: This includes a worker’s ability to set his or her schedule, the extent or lack of supervision over the worker, and the worker’s ability to work for competitors of the employee.
  • The Worker’s Opportunity for Profit and Loss: This factor looks to whether the worker’s opportunity to succeed in his or her work relates to personal initiative, managerial skill, and business acumen.
  • The Amount of Skill Required: This includes whether the work requires specialized training or skills that the employer does not provide.
  • The Permanence of the Working Relationship: Under this factor, a working relationship that is definite in duration or sporadic is indicative of independent contractor status.
  • The “Integrated Unit”: This asks whether the worker is part of a “production line” (real or metaphorical) – i.e., something requiring the “coordinated function of interdependent subparts working towards a specific unified purpose” as opposed to providing “discrete, segregable services.”

No single factor controls, although the rule indicates that the most weight should be given to, the first two factors, which are deemed as being most probative of a worker’s economic dependence on an employer.

In addition, importantly, the proposed rules contain examples of what type of facts will support a particular finding. For example, with respect to the control factor, the proposed rule states as follows:

This factor weighs towards the individual being an independent contractor to the extent the individual, as opposed to the potential employer, exercises substantial control over key aspects of the performance of the work, such as by setting his or her own schedule, by selecting his or her projects, and/or through the ability to work for others, which might include the potential employer’s competitors. In contrast, this factor weighs in favor of the individual being an employee under the Act to the extent the potential employer, as opposed to the individual, exercises substantial control over key aspects of the performance of the work, such as by controlling the individual’s schedule or workload and/or by directly or indirectly requiring the individual to work exclusively for the potential employer. Requiring the 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) does not constitute control that makes the individual more or less likely to be an employee under the Act.

The proposed rule has been submitted to Federal Register for publication.  Once published, the public will have 30 days to comment on it. If the proposed rule becomes final in its present form, employers in jurisdictions where federal law and the state/local approach align will enjoy the benefit of a streamlined classification rule that offers greater predictability. Meanwhile in states, such as California, that have more stringent limitations, employers will need to carefully evaluate their relationships with their workers and decide on a classification approach that accounts for the nuances under both federal and state/local law.

About Harrison Oldham

Harrison grew up in Mansfield, Texas. He attended Texas A&M University for his bachelor’s degree, where he met his wonderful wife, Kelsey. After graduating magna cum laude from Texas A&M, he attended SMU Dedman School of Law, graduating with honors in 2012. Today, Harrison and his wife live in Dallas, Texas with their son, Teddy.

Since graduating from SMU Law, Harrison has worked exclusively in the field of business law. He has spent time in private practice and in-house, working with clients of every size; from single person startups to Fortune 250 companies. Today his practice focuses on serving the diverse needs of businesses and individuals throughout Texas. You can learn more about Harrison by visiting his website, at: http://lonestarbusinesslaw.com/.

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