On September 25, the U.S. Department of Labor (DOL) proposed regulations which, if adopted, would establish factors for determining whether an individual is an employee or independent contractor under the Fair Labor Standards Act (FLSA). The FLSA requires employers maintain certain records regarding employees and provide a federal minimum wage and overtime to nonexempt employees. (Please see here for a discussion about joint employer obligations under the FLSA).  Currently, the FLSA defines (i) “employee” as “any individual employed by an employer” and (ii) “employ” as “to suffer or permit to work.” However, the FLSA does not define “independent contractor.”

Administrative agencies and the courts have developed an array of factors to determine whether an individual is an independent contractor. The DOL intends the proposed regulations to focus the various interpretations into five factors establishing an economic reality test, rescinding any inconsistent, prior administrative rulings and interpretations. Ultimately, if “in economic reality”: (x) an individual is “economically dependent” on the employer, then the individual is classified as an “employee”; and (y) if an individual is “in business for himself or herself”, then such individual is an independent contractor.

Proposed § 795.105(d) divides the economic reality factors into “core factors” and “other factors”, with the two core factors carrying more weight than the three other factors.  The “core factors” under proposed § 795.105(d)(1) consider the individual’s: (i) “nature and degree of […] control over the work”; and (ii) “opportunity for profit or loss.” Under the core factors, if the individual (i)”exercises substantial control over key aspects of the performance of the work” and (ii) “has an opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen or judgment),” then these factors indicate a “substantial likelihood” that the individual is an independent contractor. Alternatively, if the potential employer exercises substantial control over the individual (such as setting the individual’s schedule and prohibiting work with competitors of the business) and the individual cannot “affect his or her earnings or is only able to do so by working more”, then these factors would likely indicate an employee classification.

The “other factors” under proposed § 795.105(d)(2) consider: (i) “the amount of skill required for the work”; (ii) “the degree of permanence of the working relationship between the individual and the potential employer”; and (iii) “whether the work is part of an integrated unit of production.” Under the “skills required” factor, if the individual depends on the potential employer for specialized training then this may indicate the individual is an employee, rather than an independent contractor. Under the “permanence” factor, if the length of the work relationship between the parties is “by design definite in duration or sporadic,” then this may indicate the individual is an independent contractor. However, the proposed regulations note that seasonal work does not automatically lead to an independent contractor classification. Under the “integrated unit” factor, an individual may be considered an employee if such individual’s work is “a component of a potential employer’s integrated production process for a good or service” and not “segregable” from it.  The DOL’s discussion of the proposed regulations notes that these factors are not as probative in determining whether an individual is an independent contractor, nor do they apply in every instance.

Furthermore, the proposed regulations direct that actual practice between the parties governs the analysis of the economic reality test over what may be possible in theory or stated by the contract. For instance, if the contract authorizes the potential employer “to supervise or discipline” the individual, yet in practice the potential employer never does so, then the actual practice would likely indicate an independent contractor relationship. The DOL anticipates the proposed regulations will “add much needed clarity and efficiency to the economic reality test” and invites comments on the proposed regulations.

The DOL will be accepting comments on the proposed regulations until October 26, 2020 at http://www.regulations.gov. If and when approved, employers should review their own policies and practices to determine the affect these new regulations would have on them. For further information or guidance on revising your policies, procedures, and contracts, please contact David Paseltiner.