DOL Proposes Employer-Friendly Rule on Classification of Independent Contractors

The Fair Labor Standards Act requires employers to pay most “employees,” as the statute defines that term, a minimum wage and overtime.  Not so for workers classified as independent contractors.  But the FLSA and its regulations do not define the term “independent contractors.”  As a result, it has been largely up to the courts to construct various tests as to under what circumstances workers are appropriately classified as independent contractors rather than employees, and results have varied, creating confusion that has only grown with the rising prevalence of gig workers.

This week, the DOL attempted to provide clarification, proposing a rule that would create a new standard for evaluating whether a worker may properly be treated as an independent contractor. According to the DOL, the ultimate inquiry is still “whether, as a matter of economic reality, the worker is dependent on a particular individual, business, or organization for work (and thus is an employee) or is in business for him- or herself (and is thus an independent contractor).  But the proposed rule creates a new five-factor test, with the first two factors to be given the greatest weight.  

• The nature and degree of the individual’s control over the work.  This factor examines whether the worker “exercises substantial control over key aspects of the performance of the work.”  The DOL provides several examples of facts to consider, such as setting one’s own work schedule, choosing assignments, working with little or no supervision, and the freedom to work for others.  However, the rule assures that the worker need not be “solely in control of the work.”  Moreover, requiring workers to comply with specific legal obligations, such as carrying insurance or meeting health and safety standards, do not constitute control.
• The opportunity for profit or control.  The DOL proposes to consider this factor both in terms of the exercise of personal initiative, including business acumen and managerial skill, as well as the management of investment in or capital expenditure on helpers, equipment, or material.  For individuals who can affect their earnings only by working additional hours, this factor will weigh toward classification as an employee.
• The amount of skill required.  The DOL distinguished the skill to be considered under this factor from the exercise of on-the-job initiative, which is already weighed in the first two factors.  Instead, this factor considers whether the work requires specialized training or skill that the business does not provide.
• The permanence of the working relationship.  As proposed by the DOL, this factor would focus on the continuity and duration of the working relationship.  It does not consider the worker’s ability to work for others, which is already examined in the first factor.
• The “integrated unit.”  The DOL proposes that this factor concerns “whether the work is part of an integrated unit of production,” analogizing to workers on a production line, requiring the “coordinated function of interdependent sub parts working towards a specified unified purpose.”  The DOL counsels that this factor should not focus on whether the work is important to the employer, an inquiry that “has questionable probative value.” 

This proposed rule was published in the Federal Register just today and will now undergo a 30-day public comment period.  The rule and the test it proposes is unquestionably more employer-friendly than other approaches.  What is unclear is whether the rule will survive challenges already being mounted by worker advocates or a possible change in administration.  Even if the rule does survive, the extent to which courts give deference to this new rule may be unpredictable.  Thus, while the rule may be a useful tool in a business’s defense of its use of independent contractors, it provides no guarantee against liability.  Treating workers as independent contractors remains one of the riskier decisions when evaluating compliance with wage and hour laws, particularly because of the fact-intensive analysis used in evaluating that classification—something that does not change under this rule.  In any event, employers will still need to comply with any state laws that have a more narrow definition of independent contractor.