The U.S. Department of Labor (DOL) announced on September 21, 2020 a notice of proposed rulemaking (NPRM) that re-defines “employee” under the Fair Labor Standards Act (FLSA) as it relates to independent contractors. https://www.dol.gov/agencies/whd/flsa/2020-independent-contractor-nprm. The NPRM is available for review and public comment for 30 days after it is published in the Federal Register.
The issue of who qualifies as an independent contractor is a pesky one that has plagued employers for years. The “gig’ economy is an easy target, of course, but it’s not alone. Recently, states have taken action to address the issue of what some call “wage theft.” In January 2020, a new law in California started applying a three-part test to determine when a someone can be classified as an independent contractor. That law basically says you are an employee if you are doing work that is not outside the usual course of a company’s business. It has been challenged by gig economy companies, truckers, and freelance journalists. California’s test is also the standard in Massachusetts, New Jersey, and Connecticut. In New York and Illinois, legislators are looking to pass similar laws.
The DOL’s proposed rule:
- Uses an “economic realities” test to determine whether someone is an FLSA employee or an independent contractor. This test looks at whether a worker has their own business for (suggesting independent contractor) or is economically dependent on the organization that is paying them (suggesting employee);
- Identifies two “core factors” to analyze: (1) the nature and degree of the worker’s control over the work, and (2) the worker’s opportunity for profit or loss based on initiative and/or investment. According to the DOL, these factors can help decide whether someone is economically dependent on another’s organization or is in business for themselves;
- Identifies three more factors that serve as additional guidance in the analysis: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the worker and the potential employer; and (3) whether the work is part of an integrated unit of production; and
- Cautions that the actual practice (the “reality”) is more important than what someone is called or what “could” be.
Labor Secretary Scalia said in the press release that the DOL’s “proposal aims to bring clarity and consistency to the determination of who’s an independent contractor under the Fair Labor Standards Act. Once finalized, it will make it easier to identify employees covered by the Act, while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.”