Ensuring the proper classification of workers is a concern for many employers. Soon, it may become easier for employers to classify workers as independent contractors, thereby excluding more workers from overtime pay under the Fair Labor Standards Act (FLSA). Independent contractors also are not entitled to a minimum wage, family and medical leave, and, under many state laws, unemployment insurance. This issue has become more significant, based on the “gig” economy.

On Tuesday, September 22, 2020, the Department of Labor (DOL) proposed new regulations that make it easier for employers to classify workers as independent contractors. The DOL’s notice provides historical context as to prior rulings and regulations on the determination of a worker’s status as an employee or independent contractor. The DOL notes that technological and social changes have revealed how the DOL and court’s emphasis on investment and permanence have created misleading results. To remedy these issues, the DOL proposed a new addition to Title 29 of Code of Federal Regulations (Section 795), to explain the economic realities of a worker’s status, and specifically rejected the California ABC test following Supreme Court precedent as holding that the economic realities test is the proper standard. Tony &. Susan Alamo Foundation v. Secretary of Labor, 471 U.S. 290, 301 (1984).

The DOL’s proposed rule:

  • Adopts an “economic reality” test to determine a worker’s status as an employee or an independent contractor. The test considers five factors as to whether a worker is in
    business for her/himself (independent contractor) or is instead economically dependent on a putative employer for work (employee);

  • As part of those five factors, the DOL identifies and explains two “core factors,” specifically: (i) the nature and degree of the worker’s control over the work and (ii) the worker’s opportunity for profit or loss based on initiative and/or investment. These core factors are given greater weight in determining if a worker is economically dependent on someone else’s business or, as a matter of economic reality, is in business for themselves;

  • Identifies three other factors that may serve as additional guideposts in the analysis of economic dependence, including: (i) the amount of skill required for the work, (ii) the degree of permanence of the working relationship between the worker and the potential employer, and (iii) whether the work is part of an integrated unit of production; and

  • Advises that the actual practice is more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.

Regarding the “core factors,” the proposed regulations state that an individual who is able to set his/her own schedule, select projects, and work for others, including potential competitors, exercises the type of control over his/her work that would weigh in favor of contractor status. Additionally, if the worker has the opportunity to use his/her own initiative or managerial skill to increase profits or losses (including whether to engage helpers or purchase materials, etc.), it weighs in favor of contractor status.

The DOL is seeking public comment for 30 days on this proposal. If the DOL’s proposal is finalized, which is expected, employers will have additional clarity for classifying workers as independent contractors, and the risk of misclassification by an employer of its workers should be reduced.