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DOL Proposed Rule Clarifies Employee vs. Independent Contractor Status

DOL Proposed Rule Clarifies Employee vs. Independent Contractor Status

On Friday, September 25, 2020, the U.S. Department of Labor published a new proposed rule meant to further clarify whether a worker is considered an employee under the Fair Labor Standards Act (FLSA) or an independent contractor.

Misclassification of workers has been a “hot topic” in employment law for years. Both on the federal and state level, government agencies have cracked down on employers who misclassify workers as independent contractors rather than employees, whether deliberately or not.

Some employers prefer to classify workers as contractors to save money on employee benefits, payroll taxes, unemployment taxes, Workers Compensation insurance, and other expenses. True independent contractors are also not subject to various employment laws, including the Fair Labor Standards Act (FLSA), which contains the federal minimum wage and overtime rules.

In many cases, the misclassification is obvious. In other cases, however, the distinction is less clear. Different federal and state agencies use different definitions and different tests to determine the status of workers.

Until this week, the U.S. Department of Labor, which enforces the FLSA, has never clearly defined who is an “employee,” leaving it up to courts to determine. Now, for the first time, the DOL has issued proposed interpretations of “contractors” versus “employees.”

These interpretations should give more clarity to businesses when classifying their workers for FLSA purposes. If they are accepted, they will become a federal rule.

Although the proposed interpretations still require an “economic realities test” with several factors, they simplify the test and stress two “core factors” as determinative:

  1. The nature and degree of an individual’s control over the work; and
  2. The individual’s opportunity for profit or loss.

If both factors point toward either “contractor” or “employee” there is a “substantial likelihood” that that is the correct classification. If these factors point in opposite directions, then the test will consider three additional factors:

  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. Whether the work is part of an integrated unit of production.

In perspective, even if these proposed interpretations are accepted and become a rule, the rule would still be regarded only as “guidance.” Courts will have to give deference to the rule but will have the final say.

This guidance also only applies to the definition of an employee under the FLSA, and not other statutes. Although it will be easier to properly classify workers as contractors in some cases, in other cases it may be more difficult if the worker does not have “an opportunity for profit or loss.”

Finally, states are not bound by these interpretations and may use their own in enforcing state wage and hour laws.

A Notice of Proposed Rulemaking is available for review and public comment for 30 days, until October 26, 2020.

Andrew Kimler and Avrohom Gefen are partners in VMM’s Commercial Litigation, Alternative Dispute Respultion, and Employment Law Practices.