Whether a worker is an employee covered by the Fair Labor Standards Act (FLSA) (and potentially entitled to overtime pay or benefits) or an independent contractor who is not covered has been the center of an ongoing legal battle for many years. Most recently, it has been a key issue for those in the growing gig economy. In an effort to clarify the federal standards and provide what many see as a more employer-friendly approach to the issue than taken by the Department of Labor under President Obama, the U.S. Department of Labor (DOL) announced last week a proposed rule to clarify the rules for determining whether a worker is an employee under the FLSA or an independent contractor.
The proposed rule adopts an “economic reality” test: Is a worker in business for herself (independent contractor) or economically dependent on another entity for work (employee)? Some courts already use this test or a version of it. The DOL’s proposal identifies two “core factors” for consideration:
Factor 1: The nature and degree of the worker’s control over the work
Factor 2: The worker’s opportunity for profit or loss based on initiative or investment
These core factors are designed to help determine if a worker is independent or not. The DOL also identifies three other factors that it says may help guide the analysis:
- The amount of skill required for the work;
- An inquiry into how permanent the working relationship is between the worker and the potential employer; and
- Whether the work is part of an integrated unit of production
Taking these factors together, the DOL proposes that when determining whether a worker is an employee or independent contractor the focus should be on the actual practice and not what may be contractually or theoretically possible.
The DOL says that the proposed rule would be the department’s sole and authoritative interpretation of independent contractor status under the FLSA, replacing prior regulations, opinion letters and guidance. However, in practical terms, the rule does not have the same legal force as the FLSA’s statutory language and could be changed as early as next year if there is a change in the White House. So, absent Congress passing a law on the issue, it will be up to the courts to decide how much deference to give the DOL’s rule, if it is implemented. In the end, some courts will likely adopt the DOL rule, and some won’t. This judicial reality, combined with the fact that many states have their own wage and hour laws and have passed legislation addressing the employee vs. contractor issue, means it is likely that the DOL’s proposed rule will not end the battle on this issue.
The Notice of Proposed Rulemaking is fast-tracked for a 30-day review and public comment period.