On September 22, 2020, the US Department of Labor (DOL) issued a proposed rule offering employers guidance on whether workers should be classified as employees or independent contractors under the Fair Labor Standards Act (FLSA). The proposed rule was published in the Federal Register on September 25, 2020. There is a 30-day comment period during which the public may provide comments or ask questions about the proposed rule. This process may lead to changes in the proposed rule. Further, there may be attempts to stop or stall implementation of this proposed rule until after the November elections.

Nevertheless, let’s take a look at the proposed rule. It offers a more employer-friendly approach than prior determinations do. The DOL seeks for the proposed rule to become the “sole and authoritative interpretation of independent contractor status under the FLSA.” As a reminder, the FLSA’s rules requiring minimum wage, overtime pay, and recordkeeping do not apply to independent contractors.

The DOL proposes an “economic realities test” to determine which classification is appropriate. The bottom line is whether the worker is “economically dependent” on the employer for work and therefore should be considered an employee. Alternatively, a worker who is an “entrepreneur” or is in business for himself is an independent contractor.

In applying the economic realities test, the DOL focuses on two core factors:

1. The nature and degree of the individual’s control over the work: The control factor leans in favor of independent contractor status if the individual, as opposed to the potential employer, exercises substantial control over key aspects of the performance of the work, such as by setting his or her own schedule, by selecting his or her own projects, and/or through the ability to work for others, which might include the potential employer’s competitors.

2. The individual’s opportunity for profit or loss: This factor would lean in favor of independent contractor status to the extent the individual has an opportunity to earn profits or incur losses based on his or her exercise of initiative or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work.

The DOL deems these two factors as highly probative to the inquiry, explaining that “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.”

The DOL also listed three other factors to be considered in determining whether a worker is an independent contractor or an employee. They are:

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

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

The “actual practice” of the individual and potential employer should be the focus when examining the above factors, taking precedence over the contractual arrangement or whether a worker could, in theory, work for others.