The federal guidance on whether to classify a worker as an employee or an independent contractor continues to shift, as the U.S. Department of Labor (DOL) issued a new proposed rule favorable for companies. If finalized, the rule may provide businesses with greater latitude to engage independent contractors.

On September 22, the DOL published its proposed regulation on a new framework for deciding whether a worker is properly classified as an independent contractor under the Fair Labor Standards Act (FLSA). This new framework uses an “economic reality” test, whereby the distinction between an FLSA employee and an independent contractor turns on the worker’s “economic dependence.” The proposed rule states that, at its most basic, individuals in business for themselves are independent contractors, while those dependent on a potential employer for work are employees.

Economic Reality Test

The economic reality test is thought to be simpler, and more employer-friendly than the test applied under the Obama administration. Under the economic reality test, the DOL weighs two “core” factors; three additional “guidepost” factors are considered when the two core factors conflict with each other:

  • “Core” Factors
    • The nature and degree of the worker’s control over the work;
    • The worker’s opportunity for profit or loss;
  • “Guidepost” Factors
    • The amount of skilled required for the work;
    • The degree of permanence of the working relationship between the worker and the potential employer; and
    • The extent to which services rendered are an integral part of the employer’s business.

This proposed test signals DOL’s further departure from its prior broad interpretation of the FLSA as applied to the classification of independent contractors during the Obama administration. During the Obama administration, the DOL issued guidance, Administrator’s Interpretation No. 2015-1, outlining a framework for the classification of workers that engulfed most workers under FLSA’s purview. In contrast to the DOL’s current proposed rule, Administrator’s Interpretation No. 2015-1 underscored that no single factor should be over-emphasized in the analysis. This guidance was withdrawn in 2017 by the Trump administration’s first labor secretary, Alexander Acosta.

Potential Conflicts with Stricter State Legislation

The flexibility of the proposed federal rule runs in stark contrast to recent legislation in California. Effective January 1, 2020, workers are presumed employees — not independent contractors — under the California Labor Code if, for example, the hiring entity exerts control over how they perform their work or if the work is part of the company’s regular business. (For more on AB 5, click here.) The law has been challenged in court by gig economy companies, truckers, and freelance journalists but still stands for now. New York and Illinois legislators have expressed interest in passing similar legislation.

This legal patchwork creates a difficult landscape for employers to navigate, setting up a situation where it may make sense to use different business operating models in different states.

Next Steps

DOL leadership expressed its desire to finalize the proposed rule by this year-end, as the independent contractor issue is a priority for the current administration. This accelerated timeline for a proposed rule is unusual but notably coincides with the upcoming presidential election. It is important to remember that, even if the rule is finalized, Congress may still overturn it. Given the recent tumultuous history of the independent contractor test under the FLSA, whether this proposed rule will general long-term effects on the legal landscape remains to be seen.


 

For assistance with classification decisions, please contact your Baker McKenzie employment attorney.