Labor and Employment Alert

Department of Labor Proposes New Rule on Independent Contractors

September 24, 2020

On September 22, 2020, the U.S. Department of Labor (DOL) unveiled its long-awaited proposed independent contractor rule. The new rule sets forth a new standard for determining whether a worker can be classified as an independent contractor rather than an employee for purposes of the Fair Labor Standards Act (FLSA). However, employers will still need to be aware of and comply with state laws that apply stricter standards for independent contractor classification, such as the laws in California and Massachusetts.

Under the FLSA, “employees” are subject to certain protections, such as minimum wage and overtime requirements, while “independent contractors” are not.  But neither the FLSA nor current DOL regulations define, as a general rule, what makes a worker an independent contractor, giving rise to a patchwork of tests and rules across states and in federal courts.  As questions of classification have grown in salience over the past decade with the rise of the “gig economy,” the DOL has attempted to fill the gap.  In 2015, the DOL under President Obama issued an “Administrative Interpretation” (AI) setting forth a six-factor “economic reality” test that was widely seen as setting a demanding standard for classifying workers as independent contractors.  Then, in 2017, the Trump DOL withdrew the 2015 AI, signaling a shift to a more forgiving, employer-friendly classification standard.  Pressure has been mounting for the DOL to issue the new rule this year in light of the upcoming presidential election, which could bring about another ideological shift within the DOL.

The proposed rule creates a five-factor test to determine whether a worker is an independent contractor for FLSA purposes.  Those factors are:

  • The Nature and Degree of the Worker’s Control Over the Work: This includes a worker’s ability to set his or her schedule, the extent or lack of supervision over the worker, and the worker’s ability to work for competitors of the employee.
  • The Worker’s Opportunity for Profit and Loss: This factor looks to whether the worker’s opportunity to succeed in his or her work relates to personal initiative, managerial skill, and business acumen.
  • The Amount of Skill Required: This includes whether the work requires specialized training or skills that the employer does not provide.
  • The Permanence of the Working Relationship: Under this factor, a working relationship that is definite in duration or sporadic is indicative of independent contractor status.
  • The “Integrated Unit”: This asks whether the worker is part of a “production line” (real or metaphorical) – i.e., something requiring the “coordinated function of interdependent subparts working towards a specific unified purpose” as opposed to providing “discrete, segregable services.”

No single factor controls, although the rule indicates that the most weight should be given to, the first two factors, which are deemed as being most probative of a worker’s economic dependence on an employer.

Not only does the new rule provide a clear, unified federal standard on independent contractor classification, but it puts less emphasis on certain indicia that are relevant under current court-created tests, which the DOL view as less relevant under the modern economy.  For example, the DOL notes that falling transaction costs of hiring have led to shorter job tenures and that a knowledge-based economy means that independent contractors may not need to make significant capital investments of their own.  Accordingly, the proposed rule de-emphasizes the importance of job tenure and worker investments, which had been factors cited in tests created by courts on the issue.

The proposed rule has been submitted to Federal Register for publication.  Once published, the public will have 30 days to comment on it.  However, it is unclear whether the proposed rule will survive a potential change in control of the White House or Congress, or even be implemented in the first place.  If it does become final, the new rule will provide little comfort to employers in states like Massachusetts and California, which impose stricter tests for determining whether a worker can be classified as an independent contractor under state law.  In those states, employers will need to continue to apply the state-specific test, which may result in treating a worker as an employee even though the worker would qualify as an independent contractor under the federal test.