The U.S. Department of Labor (“DOL”) recently released a proposed rule seeking to clarify independent contractor vs. employee status under the Fair Labor Standards Act (“FLSA”).   The proposed rule seeks to simplify the “economic realities” test currently applied by federal courts in various forms.  “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,” Secretary of Labor Eugene Scalia explained in the DOL’s news 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.”

Current Test

Currently, the factors generally considered by the courts to varying degrees under the economic realities test are:

1. The extent to which the services rendered are an integral part of the principal’s business.
2. The permanency of the relationship.
3. The amount of the alleged contractor’s investment in facilities and equipment.
4. The nature and degree of control by the principal.
5. The alleged contractor’s opportunities for profit and loss.
6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
7. The degree of independent business organization and operation.

Proposed Rule: Two Core Factors

Under the proposed rule, the DOL has retained but modified this test, focusing on two core factors and identifying three other factors that may serve as additional guideposts.

The two core factors under the proposed rule are:

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

The DOL has explained that these core factors are “highly probative to the inquiry because the ability to control one’s work and to earn profits and risk losses strikes at the core of what it means to be an entrepreneurial independent contractor, as opposed to a ‘wage earner’ employee.”  Additionally, “control and opportunity for profit or loss drive at the heart of what it means to be an independent contractor who is in business for oneself and are the most relevant factors in virtually every case.”

Under the proposed rule, the first core factor would weigh in favor of an independent contractor finding if the individual exercises substantial control over key aspects of his or her performance.  Examples include “setting his or her own work schedule, choosing assignments, working with little or no supervision, and being able to work for others, including a potential employer’s competitors.”  The proposed rule clarifies that requiring an individual to comply with legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines, or standards, or to meet other similar terms typical of contractual relationships between businesses would not constitute control that would make the individual more or less likely to be an employee under the FLSA.

The second core factor would weigh in support of an independent contractor finding if the individual has an opportunity for profit or loss based on either or both: “(1) The exercise of personal initiative, including managerial skill or business acumen; and/or (2) the management of investments in, or capital expenditure on, for example, helpers, equipment, or material.”  If the individual is unable to affect his or her earnings through initiative or investment or is only able to do so by working more hours or more efficiently, then the factor would weigh toward employee classification.

If both core factors point toward the same classification, then the “bulk of analysis is complete.” However, if the two core factors do not point toward the same classification, then the remaining guideposts should be considered to determine the appropriate classification.  These three other factors are: (i) the amount of skill required for the work; (ii) the degree of permanence of the working relationship between the worker and the potential employer; and (iii) whether the work is part of an integrated unit of production.

Lastly, the proposed rule emphasizes that when analyzing whether a worker is an employee or independent contractor under the FLSA, the actual practice of the worker(s) and potential employer is more relevant than what may be contractually or theoretically possible.

Public Comments Can Be Submitted and Viewed Electronically

Comments on the proposed rule must be submitted by October 26, 2020, and can be submitted electronically via the Federal Register website.  The site also provides additional details about the proposed rule and access to the comments submitted to date.  The rule will not go into effect until after the DOL considers the public comments and publishes a final rule.

If finalized, the rule will provide greater clarity, in the context of the FLSA, to businesses that engage independent contractors.  Generally, courts will apply an agency’s rule that reasonably interprets a statute.  However, an agency’s rule can be subject to challenge, for example, if it contradicts the statute in question or the statute directly speaks to the issue.  (See our recent blog post.)  Further, the DOL’s independent contractor rule will not impact other federal agencies’ rules (IRS or NLRB) or state laws that apply more stringent independent contractor classification standards such as the ABC test adopted in several states (e.g., California’s AB 5).