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Businesses engaging independent contractors have new guidance from the Department of Labor (DOL) for determining whether an individual is an employee or independent contractor, but the guidance may never take effect. On January 6, 2021, the DOL issued a final rule for determining whether an individual is an employee or independent contractor. The rule focuses on whether workers are economically dependent on another business–making them more likely to be an employee of that business, and entitled to the minimum wage and overtime under the Fair Labor Standards Act (FLSA)–or are economically dependent upon themselves, making them true independent contractors.

However, the rule is scheduled to take effect on March 8, 2021-after President-elect Joe Biden is sworn in as president. There is the possibility that upon being sworn in, President-elect Biden will issue an Executive Order staying the effective date of all regulations not yet in force, meaning the rule may be of no consequence to businesses trying to determine whether workers are independent contractors or employees.

The DOL rule is similar to the business-friendly January 2019 NLRB decision in SuperShuttle DFW, Inc. (which we blogged about here), adopting an employee-contractor classification test with a focus on an individual’s “entrepreneurial opportunity” and the worker’s independence to make meaningful decisions bearing on profit or risk of loss.

The new final rule reaffirms an “economic reality” test to determine whether an individual is an independent contractor or is actually economically dependent on a potential employer for work (i.e., an FLSA employee), and narrows the test to five factors.

The five factors and the importance of actual practice

Two “core factors”–(i) the nature and degree of control over the work, and (ii) the worker’s opportunity for profit or loss based on initiative and/or investment–are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself. If these two factors point to the same conclusion, the DOL states no further investigation is needed.

  1. The nature and degree of control over the work weighs in favor of independent contractor status when the individual exercises substantial control over key aspects of performance of the work, such as setting his or her own schedule and selecting his or her projects, as well as having the ability to work for others (which could include the potential employer’s competitors). In contrast, if the potential employer controls key aspects of the performance of the work, this factor weighs in favor of the worker being an employee. However, requiring the worker to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships) does not constitute “control” that makes the individual any more or less likely to be an employee.
  2. The worker’s opportunity for profit or loss weighs in favor of individual contractor status to the extent the worker has an opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill, business acumen, or judgment) or management of his or her investment in helpers, equipment or material to further his or her work. On the other hand, this factor weighs towards the individual being an employee when the worker is either unable to affect his or her earnings or can only do so by working more hours or faster.

    Three other factors
    may serve as additional guideposts, especially when the two core factors do not point to the same classification. The factors are:

  3. The amount of skill required for the work (weighing in favor of independent contractor status if the work requires specialized training or skill the potential employer does not provide);
  4. The degree of permanence of the working relationship (weighing in favor of independent contractor status to the extent the work relationship is by design definite in duration or sporadic–which may include regularly occurring fixed periods of work–but the seasonal nature of work by itself is not indicative of independent contractor status); and
  5. Whether the work is part of an integrated unit of production (weighing in favor of independent contractor status to the extent his or her work is segregable from, as opposed to an integrated component of, the potential employer’s production process for a good or service).

The rule also emphasizes that the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible. For example, an individual’s theoretical abilities to negotiate prices or to work for competing businesses are less meaningful if, practically, the individual is prevented from exercising those rights. Similarly, a business’ contractual authority to supervise or discipline an individual may be of little relevance if the business never exercises that authority.

In addition, the final rule provides six fact-specific examples applying the new factors, including a finding that an individual who accepts assignments from an app-based service linking those needing home-repair work with those who perform it is an independent contractor when he is able to meaningfully increase his earnings by his own initiative and investing in his own equipment, despite the company’s investment of millions of dollars in developing and maintaining the app.

Key points and takeaways

Though companies engaging independent contractors may feel assured by the final rule (if it is, in fact, enacted), they should still take steps to ensure that workers they have labeled as “independent contractors” actually meet the test.

As a start, companies should review the rule’s fact-specific six examples, which could provide insight for companies whose engagement of independent contractors fit into similar fact scenarios. Companies should also take a close look at their working relationships with presumed independent contractors, focusing on:

  • Who exercises control over the key aspects of work (such as schedules, workloads and how the work is to be performed);
  • Whether the individual’s earnings are tied exclusively to hours worked or production rates as opposed to the individual’s investment, initiative and business acumen;
  • Whether the individual’s role requires no special skill (or is reliant on the potential employer for skills or training necessary for the job);
  • Whether the working relationship has been designed as definite or continuous; and
  • Whether the individual’s work is able to be separated from necessary components of the employer’s operations.

Companies should also conduct audits under privilege with counsel to determine whether modifications are required to reinforce classification decisions or to reclassify workers, and to guard against potential exposure while implementing any necessary changes. Taking the time to ensure appropriate worker classification now can protect against costly compliance issues in the future.

Aside from the likelihood that President-elect Biden will freeze the rule, the prospects of some aspects of the Protecting the Right to Organize Act (PRO Act) being enacted have increased given the outcome in the Georgia Senate races. The PRO Act utilizes the “ABC” test to determine if a worker is an independent contractor for purposes of the National Labor Relations Act, requiring the worker to be free from control, to operate outside of the proposed employer’s typical course of business, and to be customarily engaging in the trade.

For help navigating the new final rule and any subsequent developments and your other employment needs, contact your Baker McKenzie employment attorney.