DOL proposes rule changes to clarify role of independent contractors
'Employers should carefully monitor this development,' says an attorney on the proposed 'economic reality' test.
Businesses would find it simpler to decide whether to classify workers as independent contractors under proposed legislation released by the U.S. Department of Labor on Sept. 22. The interpretation of employee status would be more employer-friendly than how it was applied during the Obama administration, according to Bloomberg Law.
The proposal will be subject to a 30-day comment period after it’s published in the “Federal Register” in the coming days. The proposed rule adopts an “economic reality” test for determining which workers qualify as independent contractors. It explains that contractors must be in business for themselves, rather than being economically dependent on the possible employer for work.
“Employers should carefully monitor this development because it may provide much greater clarity on when and how independent contractors can be utilized within their business operations without the risk that those workers will subsequently claim that they should be treated as employees for FLSA purposes,” said Brian Peterson, an attorney at Spencer Fane LLP.
The Labor Department proposes giving greater weight to two core factors to determine employment status:
- The nature and degree of the employer’s control over the work; and
- The worker’s opportunity for profit or loss based on personal initiative or investment.
If these core factors are in conflict, three more “guideposts” would be considered:
- The amount of skill required in the work;
- The degree of permanence in the work relationship; and
- Whether the work is part of an integrated unit of production.
“The department’s proposal aims to bring clarity and consistency to the determination of who’s an independent contractor under the Fair Labor Standards Act,” Labor Secretary Eugene Scalia said in a statement.
“Once finalized, it will make it easier to identify employees covered by the act, while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.”
Adapting to the gig economy
The department hopes to give businesses clarity on a contested area of employment law and some protection from lawsuits that have accused companies in the gig economy and other industries of reducing the pay of workers by classifying them as contractors.
However, a senior department official said some federal judges might not give deference to the rule after it is finalized.
The Labor Department has fast-tracked the regulation, so it will be finalized by the end of President Trump’s term on Jan. 20. It is, in part, a response to efforts in some Democratic-run states to widen the legal definition of an employee. California’s Assembly Bill 5, which took effect in January, applies a rigid three-part test for determining when a worker can be classified as an independent contractor.
The law, which has been challenged in court by gig economy companies, truckers and freelance journalists, generally designates workers as employees if they’re doing work that isn’t outside the usual course of a company’s business. New York and Illinois legislators have expressed interest in passing similar legislation.
Business groups and Republicans cite varying court interpretations and state laws to argue that employers need a clear federal test to determine worker status and those compelling companies to reclassify workers as employees would force some to close because of increased costs. Unions and Democrats favor expanding employee status, contending that workers often are misclassified as independent contractors, which allows companies to dictate workers’ economic conditions while denying them basic workplace protections.
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