On September 22, 2020, the U.S. Department of Labor (DOL) released its first-ever proposed rule outlining a test for when a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA).

In its proposed rule, the DOL has created a new framework for the well-established “economic reality” independent contractor test. This test is used to determine whether the individual is truly in business for themselves (an independent contractor) or is economically dependent on their employer for work (an employee).

Existing Guidance: Seven Equal Factors

In the DOL’s existing guidance, the DOL puts forth seven “economic reality” factors, all of which are to be given equal weight:

  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 and Three Guidepost Factors

The DOL has proposed that these existing seven equal factors be replaced with two “core factors” and three “guidepost” factors. The two “core” factors are the primary factors that will be given the most, if not exclusive, weight in the analysis. The three “guidepost” factors are only to be used as tie-breakers if the analysis of the core factors does not provide a clear answer.

Core Factors:

  1. The nature and degree of the worker’s control over the work. If the individual exercises substantial control over key aspects of the job, this factor favors the individual being classified as an independent contractor.
  2. The individual’s investment and opportunity for profit or loss. Individuals who (a) exercise personal initiative, including through their managerial skill or business acumen, and/or (b) manage investments in, or capital expenditure on work-related materials, research, or personnel. The DOL clarifies that the “side-by-side comparison method” is abandoned in the proposed rule because individual workers will inevitably have fewer resources than businesses.

Guidepost Factors:

  1. The amount of specialized training or skill required for the work that the potential employer does not provide.
  2. The degree of permanence of the working relationship, focusing on the continuity and duration of the relationship and weighing towards independent contractor status if the relationship is definite in duration or sporadic.
  3. Whether the work is “part of an integrated unit of production.” The DOL has proposed to assess whether the proposed contractor’s work is “integrated” rather than “integral” to the potential employer’s business. If an individual is merely a part of a potential employer’s integrated production process, then that points to the individual being an employee, not an independent contractor. Conversely, if an individual’s work is segregable from the potential employer’s production process, that favors the individual being an independent contractor.

Potential Effect of Proposed Rule

Secretary of Labor Eugene Scalia explained in an editorial that since the Supreme Court “last spoke to the issue nearly 60 years ago… employers and workers looking for guidance have had to parse the sometimes-divergent decisions of the federal courts of appeal and opinion letters the Labor Department issues occasionally without public notice or input.” With this proposed rule, Secretary Scalia continued, the DOL hopes to create a “simple, clear approach that can be applied consistently nationwide.”

While the proposed rule would clarify a murky and inconsistently-applied framework, critics, including the legal director of the National Employment Law Project, have argued that the proposed rule leans too heavily toward classifying workers as independent contractors and would “raise the threshold for contract workers, which includes gig workers, to be considered employees, a category which comes with significantly more protections.” See Eli Rosenberg, “New Trump Administrative Rule Could Make it Harder for Gig and Contract Workers to Have Rights as Employees,” The Washington Post (Sept. 22, 2020, 4:23 PM).

The proposed rule also comes soon after California’s newly-enacted AB5, which aims to force “gig” companies such as Lyft and Uber to treat their workers as employees, has put independent contractor laws into the spotlight. The DOL’s rule will have no effect on California’s AB 5 or any other state law definitions of independent contractors.

The public only has 30 days to file comments from the date of publication of the proposed rule in the Federal Register. Those interested in filing comments will be able to do so electronically at federalregister.gov.

If you have any questions about the proposed rule or about the proper classification of your organization’s workers, do not hesitate to contact the authors of this blog or any Dykema labor and employment attorney.