On Sept. 22, 2020, the U.S. Department of Labor (DOL) announced a proposed Rule that addresses how to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The proposed Rule may be a welcome change for employers, because it seeks to clarify the test for whether workers are employees – who are subject to the FLSA – or whether workers are independent contractors and outside of the requirements of the FLSA. The Act had not previously defined “independent contractor,” but the proposed Rule sets forth a new test to answer this legal question, with significant implications for some employers.
The FLSA
The FLSA requires covered employers to pay the federal minimum wage to their nonexempt employees for each hour worked and overtime pay for each hour over 40 worked in a workweek. If an employer misclassifies employees as independent contractors rather than as employees subject to the hourly wage and overtime provisions of the FLSA, such violations are subject to considerable fines and penalties.
Courts and the DOL’s Current Legal Test
Currently, the FLSA does not define the term “independent contractor,” and the DOL has never before issued specific regulations addressing who is an independent contractor and not subject to the FLSA. Lacking such guidance, courts have been forced to devise legal tests for which employees are independent contractors and which are employees. To do so, courts have looked to the Act, under which the meaning of “employ” includes “to suffer or permit to work.” Courts have held that “suffer or permit” is broad on its face and more inclusive than the common law standard for determining who is an employee.
The DOL has also generally relied on a multifactor test that looks at the economic realities of the working relationship to determine whether the worker is an employee. In April 2019, the DOL identified six factors that are relevant to determine the economic relationship:
(1) The nature and degree of the potential employer’s control
(2) The permanency of the worker’s relationship with the potential employer
(3) The amount of the worker’s investment in facilities, equipment or helpers
(4) The amount of skill, initiative, judgment or foresight required for the worker’s services
(5) The worker’s opportunities for profit or loss
(6) The extent of integration of the worker’s services into the potential employer’s business
The test above has been difficult to apply, and at times, courts have made determinations based upon limited evidence that a single or a few facts were dispositive. For example, an employer’s control over the work of a worker could be demonstrated by something like a requirement that the employer carry insurance for the worker, or that a worker must meet a quality standard or contract deadline. While such a fact does tend to show that an employer exercises control over a worker, such a degree of control often does not comport with a lay person’s – or an employer’s – idea that such a worker is an employee. This type of hyper focus on the issue of “control” will be changed under the proposed Rule.
The Proposed New Rule
The DOL recognizes that the modern knowledge economy, with its highly transient workforce, is perhaps not well-suited to the six-factor test above. In particular, the DOL noted that factors regarding the permanency of the employee and the amount of a worker’s investment in facilities are out of step with the economic realities of today’s workforce.
The new Rule proposes a simplified test, focused primarily on two factors:
1. The nature and degree of the individual’s control over his or her work
2. The individual’s opportunity for profit or loss
If the two-factor test reveals that both factors lean toward independent contractor status, it is substantially likely, under the new Rule, that the individual is an independent contractor and vice versa when an individual’s two factors lean toward an employee classification.
This proposed new test turns on whether a worker is in business for himself or herself or is economically dependent upon the employer for work.
The following factors are also part of the proposed new Rule:
For now, there is no guarantee that the proposed rule will become final. However, it is important to remember the DOL factors pertain specifically to an analysis under the FLSA, though other federal and state entities, including the federal Internal Revenue Service and state taxation, unemployment and workers’ compensation agencies, have utilized similar factors to the DOL’s. It remains to be seen whether those entities will follow the DOL’s suit, though some states, such as California, employ a more stringent test that presumptively consider workers to be employees – these states are unlikely to change.
At this time, there are two action items that employers should consider:
1. Submit a Comment: The proposed Rule was officially published on Sept. 25, 2020. The DOL intends to put the new rules in place quickly and has provided a short timeline – only 30 days – to submit written comments. If this Rule has potential to impact a large portion of your workforce, you should contact counsel for help in submitting comment.
2. Evaluate Your Workforce: Now is a good time to start thinking about whether there are any workers whose classification could potentially change under the new Rule and determine how it would affect your business and employee relations. Although it may soon be easier to classify workers as independent contractors, there are many reasons not to. If you are planning an audit of your workforce, you may want to wait to finalize the audit until the final Rule is published.
If you need assistance submitting a comment or evaluating or auditing your workforce, contact Susan Motschiedler in Salt Lake City by calling (801) 532-1234 or send an email to smotschiedler@parsonsbehle.com or call Amy Lombardo in Boise by calling (208) 562-4900 or send an email to alombardo@parsonsbehle.com.
