Organizations across the United States will have a clearer framework for classifying workers as independent contractors under a new proposal released by the Department of Labor (DOL) on Tuesday.
The proposed regulation provides a model for when businesses may legally classify workers as independent contractors rather than employees, who are covered by federal minimum wage and overtime law. The DOL is proposing a more employer-friendly interpretation of employee status under the Fair Labor Standards Act (FLSA) than it applied during the Obama administration.
“The Department’s proposal aims to bring clarity and consistency to the determination of who’s an independent contractor under the Fair Labor Standards Act,” said Secretary of Labor Eugene Scalia in the DOL’s release. “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.”
The DOL’s rule proposal comes amid recent state legislation passed in California, which took aim at companies with a business model that relies heavily on independent contractors, such as Uber and Lyft. Both ride-hailing companies have been involved in an ongoing legal battle with the state over the Assembly Bill 5, which went into effect Jan. 1. The bill expands on the California Supreme Court decision from 2018 known as the Dynamex, which uses an “ABC” test to determine employment status. The language reads that a worker is an employee if the worker’s tasks are a) performed under an organization’s control; b) those tasks are central to that company’s business; and c) the worker does not have an independent enterprise in that trade.
The DOL’s proposed rule adopts an “economic reality” test for determining which workers qualify as independent contractors. The test considers whether a worker is in business for themselves, rather than being “economically dependent on a punitive employer for work.”
In its existing Fact Sheet #13 on the “Employment Relationship,” the DOL lists seven “economic reality” factors.
- The extent to which the services rendered are an integral part of the principal's business.
- The permanency of the relationship.
- The amount of the alleged contractor's investment in facilities and equipment.
- The nature and degree of control by the principal.
- The alleged contractor's opportunities for profit and loss.
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
- The degree of independent business organization and operation.
The proposed rule would replace this list of seven factors with two “core factors” and three “guidepost factors” for determining if the worker is economically dependent.
The two “core factors” are the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on initiative and/or investment. These factors, the DOL asserts, help determine if a worker is economically dependent on someone else’s business or is in business for themselves.
The three other factors that may serve as additional guideposts in the analysis are:
- the amount of skill required for the work;
- the degree of permanence of the working relationship between the worker and the potential employer;
- and whether the work is part of an integrated unit of production.
The DOL also said that it “advises that the actual practice is more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.”
The proposal is subject to a 30-day public comment period after it is published in the Federal Register. This is shorter than the usual 60- or 90-day public comment period, indicating the DOL is fast-tracking the finalization of the rule.
About the Author
Brett Christie is the managing editor of Workspan Daily.