The Department of Labor (DOL) recently published a Notice of Proposed Rulemaking on its decision to revise its interpretation of whether workers are employees or independent contractors under the Fair Labor Standards Act (FLSA).  85 FR 60600 (Sep. 25, 2020).  FLSA requires covered employers to pay their nonexempt employees at least the federal minimum wage for every hour worked and overtime pay for every hour worked over 40 hours in a workweek.  It also requires that employers keep certain records regarding their employees.  A worker who performs services as an independent contractor, however, is not considered to be an employee under FLSA, so the FLSA does not require persons to pay an independent contractor either the minimum wage or overtime pay or keep records regarding the independent contractor.

Multifactor Test

Whether a worker is an employee or an independent contract under FLSA has been subject to considerable litigation.  DOL and the courts generally use a multifactor test to determine whether a worker is an employee or an independent contractor.  The key inquiry is whether, as a matter of economic reality, the worker is dependent on a particular individual, business, or organization for work (and thus is an employee) or is in business for him- or herself (and thus is an independent contractor).

Factors To Be Used

According to DOL, the proposed regulations would adopt the general interpretations used by the DOL and the courts.  The proposed regulations set forth five non-exclusive factors to be used to determine economic dependence:

1. The nature and degree of the worker’s control over key aspects of the work. Control includes things like setting the schedule, selecting projects, and the ability to work for others.  The more control the worker has, the more likely that he/she is an independent contractor.

2. The worker’s opportunity for profit or loss. The worker is more likely to be an independent contractor if he/she has an opportunity to earn profits or incur losses based on his/her exercise of initiative or management.  A worker is more likely to be an employee if the worker is unable to affect his/her earnings or is only able to do so by working more hours or more efficiently.

3. The amount of skill required for the work. If the work requires specialized training or skill that the potential employer does not provide, this weighs in favor of the worker being an independent contractor.  On the other hand, if the work does not require specialized training or skill and/or the worker is dependent upon the potential employer to equip him/her with any skills or training necessary to perform the job, the worker is more likely to be an employee.

4. How permanent is the working relationship between the worker and the potential employer. If there is a finite period of time in which the worker is performing work or the work is sporadic, this weighs in favor of the worker being an independent contractor.  However, the seasonal nature of work by itself would not necessarily indicate that the worker is an independent contractor.

5. Whether the work is part of an integrated unit of production. If the work being performed is segregable from the potential employer’s production process, this weighs in favor of the worker being an independent contractor.

Core Factors

While no single factor is dispositive, the two core factors – the nature and degree of the individual’s control over the work and the worker’s opportunity for profits or losses – are the most probative and will be afforded greater weight than the other factor.  If these two factors both point towards the same classification (employee or independent contractor), there is a substantial likelihood that is the classification is accurate.  The other factors are highly unlikely, individually or combined, to outweigh the combined weight of the two core factors.  According to DOL, the emphasis on the two core factors is a change from how courts have examined worker classification.

Comments

Comments on DOL’s Notice are due by October 26, 2020.  Interested persons can submit their comments through www.regulations.gov.