On September 22, 2020, the US Department of Labor (DOL) issued proposed regulations aimed at codifying the classification of independent contractors under federal wage and hour law. If adopted—and the DOL has indicated it plans to fast-track the rulemaking process in order to issue final regulations by January 2021—the rule change would significantly relax the parameters for defining independence. The purpose of the proposed rule change, according to Labor Secretary Eugene Scalia, is to clarify which workers are truly independent, and therefore not protected by federal minimum wage and overtime laws.

The potential misclassification of workers as independent contractors has been the subject of renewed scrutiny with the growth of the gig economy. The Obama administration issued informal guidance attempting to limit the scope of independent contractor status, but the current administration withdrew that guidance on June 7, 2017. The current proposed rule, which would amend and add to the DOL’s wage and hour regulations, proposes an “economic reality” test that takes into account whether the worker is in business for themselves (which weighs in favor of independence), or whether the worker is economically dependent on the putative employer for work (which leans toward a finding of dependence, or employee status).

In determining the degree of economic dependence, the rule principally considers two core factors: (1) the nature and degree of the individual’s control over the work (i.e., the more control the worker has over her schedule, the performance of the work, selection of projects, and/or ability to work for others, the more likely she is to be an independent contractor), and (2) the individual’s opportunity for profit or loss (i.e., the greater the risk, the more likely the individual is independent). In the event that the two factors lead to inconsistent results, the DOL proposes three “guideposts” of lesser weight to help determine in which direction the needle should ultimately point: 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 proposed rule reminds that the reality of the working relationship, not the terms of a written contract or informal understanding, dictates the final determination of independence.

If adopted as written, the proposed regulations may help employers facing federal lawsuits under the Fair Labor Standards Act, but the adoption of a new federal standard would not eliminate the risk employers face under narrower state wage laws. For example, California adopted AB 5, which generally concludes that a worker is an employee unless the hiring business shows the worker operates autonomously, performs work that is not the putative employer’s main business, and is regularly and independently engaged in the work they are hired to do. The DOL acknowledged that the proposed regulation may be persuasive even outside the federal courts, but that employers must comply with state laws if they are stricter than federal law on the issue of independent contractor classification.

We will continue to monitor and update on the progress of the proposed regulation, but employers are encouraged in the meantime to consult with counsel about the test (or, if multijurisdictional, tests) applicable to them where they do business.