By Lindsay M. Massillon
As published in the Daily Business Review | October 08, 2020
On Sept. 22, the Department of Labor (DOL) released a notice of proposed rulemaking (NPRM) proposing a new rule clarifying the standard for evaluating whether a worker is an employee or an independent contractor. The proposed rule adds a new Part 795 to the Fair Labor Standards Act (FLSA) titled “Employee or Independent Contractor Classification under the Fair Labor Standards Act.” The DOL has provided for only 30 days for the public to file comments after the proposed rule is published, signaling the department’s eagerness to issue a final rule before the end of the year.
Incorrectly classifying a worker as an independent contractor can result in adverse consequences for employers. A true independent contractor is not covered by the FLSA and therefore not entitled to minimum wage or overtime. Of course, businesses stand to save a significant amount in labor costs if relieved from the requirement to pay overtime to workers and therefore would benefit from the increased use of independent contractors. However, the manner in which the Department and courts have decided whether someone is an employee or not has been inconsistent making it difficult to know whether workers are properly classified. The DOL has never issued a regulation setting the standard itself which is why clarity is so desperately needed on the issue. The rule, if finalized, would be the department’s sole authority on the topic and would streamline the analysis by expressly identifying the most important elements of an independent contractor versus an employee.
Economic Realities Test
Historically, courts have used a set of factors to determine whether a worker, as an economic reality, was dependent on the business for which they worked. See Bartels v. Birmingham, 332 U.S. 126, 130 (1947) (relying on factors set forth in United States v. Silk, 331 U.S. 704 (1947)). While the courts’ definitions of “employee” have caused Congress to amend certain laws, such as the National Labor Relations Act, to the “avoid the uncertainty” of the economic realities test in favor of a common law standard, Congress did not make such changes to the FLSA. Therefore, when assessing whether a worker is covered by the FLSA and entitled to minimum wage and/or overtime, federal courts of appeals have expressed slightly different versions of the economic realities test which consist of anywhere between five and seven factors. In 2008, DOL’s Wage and Hour Division (WHD) published Fact Sheet #13 which identified seven economic reality factors:
(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 opportunity for profit and loss;
(6) the amount of initiative, judgment, or foresight in open market competition with other required for the success of the claimed independent contractor; and
(7) the degree of independent business organization and operation
At its core, the economic realities test looks at “economic dependence,” but, according to the DOL, the multiple factors used to test dependence create confusion because there is no “anchor.” Further, there has been no consistent guidance as to how to balance the factors where some fall in favor of “employee,” and others in favor of “independent contractor.” Some courts have provided greater weight to certain factors under particular circumstances, but the decisions vary so widely that it is nearly impossible to predict how a court will rule. The Department also commented that the test looks to factors which are redundant or not relevant in a modern economy.
The Proposed Regulation
The DOL’s proposed regulation would replace the seven factors stated in Fact Sheet #13 with two “core” factors and three “guidepost” factors. By emphasizing certain factors over others, the department hopes to provide a more precise method for evaluating the nature of a worker’s relationship.
The core factors are (1) the nature and degree of the worker’s control over the work; and (2) the worker’s opportunity for profit or loss. These two factors will serve as the primary assessment for determining a worker’s status and will be given the greatest weight. The department reasoned that the two core factors are focused on what it means to be an entrepreneur versus a wage-earner. The more flexibility a worker has in determining his or her own schedule or methods, combined with tangible risk and reward, point toward a true “entrepreneurial independent contractor.” Additionally, while agreeing that the level of control is not the only factor, the DOL signals how significant that factor is by affording it greater weight. The department also noted that when courts found that the potential employer controlled the work, the conclusion was that the worker was an employee. Therefore it would not be necessary for the court to spend time evaluating the other factors to arrive at the same conclusion.
In contrast to the two core factors, the three guidepost factors are less important and not necessarily indicative either way of someone who is in business for themselves. The three guidepost factors are (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the individual and the potential employer; and (3) the extent to which services rendered are an integral part of the potential employer’s business. The department found that giving these three factors the same weight as the two core factors can lead to inconclusive or misleading results. For example, the work of both independent contractors and employees may be deemed “integral” to the business.
Thus, the analysis begins with two questions: (1) does the worker exercise substantial control over the key aspects of the work; and (2) does the worker have an opportunity for profit or a risk of loss based on initiative or investment? If the answer to both is “yes,” the worker is most likely an independent contractor. If “no,” an employee. If unclear or one is “yes” the other “no,” then the other factors would be considered.
It is not clear how this regulation will affect the labor market, and whether some “employees” would be considered “independent contractors” if the proposed rule is finalized. The Department predicts that, by eliminating the uncertainty surrounding classification of workers, companies may engage more independent contractors thereby decreasing unemployment rates. If the regulation becomes effective, employers would be well-served to consult with an employment attorney to evaluate whether it may be appropriate to reclassify any employees as independent contractors.
Once the comment period is closed, the department will review the comments, make changes if necessary, and issue a final rule implementing the regulation.
Lindsay M. Massillon is a Miami shareholder at Fowler White Burnett. She focuses her practice on labor and employment law and commercial litigation. Contact her at LMassillon@fowler-white.com.