DOL Proposes Employer-Friendly Standard for Independent Contractors

Author: Michael Cardman, Brightmine Legal Editor

September 22, 2020

The US Department of Labor (DOL) today proposed new regulations that could make it easier for gig economy companies and other businesses to classify workers as independent contractors rather than employees.

The new regulations will "reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility," a DOL official predicted.

Currently, neither the Fair Labor Standards Act (FLSA) nor its regulations define the term independent contractor. However, the federal courts have developed a relatively uniform set of factors to determine independent contractor status, commonly referred to as the economic realities test.

The DOL said this test, and the process of applying it, has lacked focus and has not always been sufficiently explained by courts or by the DOL, resulting in uncertainty for employers.

A Five-Factor Test

With its new regulations, the DOL intends to "sharpen this inquiry" into the following five distinct factors, rather than the overlapping factors used by most courts and by the DOL previously:

1. The nature and degree of the individual's control over the work;
2. The individual's opportunity for profit or loss;
3. The amount of skill required for the work;
4. The degree of permanence of the working relationship between the individual and the potential employer;
5. Whether the work is part of an integrated unit of production.

The first two factors would be considered "core factors" and given greater weight than the other three.

Also, the actual practice of the parties involved would be considered more relevant than what may be contractually or theoretically possible. For example, if a contract gives a business the authority to supervise or discipline a worker, but the business never actually exercises that authority, it will not weigh heavily against determining that the worker is an independent contractor.

A Sharp Turn

If finalized, the DOL's new regulations would mark the culmination of a long-term campaign to change the federal government's approach to independent contractor classification.

In 2015, the Obama administration took a more employee-friendly stance, under which most workers were to be treated as employees rather than independent contractors.

Two years later, under the Trump administration, the DOL withdrew that guidance. But the agency had not put forward a replacement until now.

Next Steps

A Notice of Proposed Rulemaking (NPRM) will soon be published in the Federal Register. Employers will have 30 days from the time the NPRM is officially published to comment. Comments may be submitted online under Regulatory Information Number (RIN) 1235-AA34 or by mailing written submissions to:

Division of Regulations, Legislation and Interpretation

Wage and Hour Division, US Department of Labor, Room S-3502

200 Constitution Avenue, N.W.

Washington, DC 20210

Written submissions must include the name of the agency and the RIN 1235-AA34.

After the comment period ends, the DOL will respond to comments and possibly make revisions before publishing a final rule. This final rule will include a formal effective date.

The Final Word?

The regulations could be repealed under the Congressional Review Act if Joe Biden is elected president and Democrats take control of the Senate and retain control of the House.

But even if they survive a congressional review, the regulations would hardly be the final word in independent contractor classification.

First of all, they would apply only under the FLSA, which governs federal minimum wage and overtime requirements. A stricter standard would continue to apply under many other federal laws and under a complex patchwork of state laws - most notably, California, which recently established one of the strictest tests in the nation.

Also, courts may not necessarily follow the DOL's interpretation. Although regulations that undergo a public comment period are entitled to substantial deference from the courts, it is not a sure thing given the enormous body of existing case law interpreting independent contractor status under the FLSA.

A DOL spokesperson speaking on background told HR & Compliance Center that the DOL "believes the proposed rule is persuasive and will be followed by courts and useful to the public."