Department of Labor Proposes Rule Establishing “Economic Reality” Test for Independent Contractors

Oct 26, 2020

by Veronica Potter

On September 22, 2020 the Department of Labor announced a proposed rule relating to the definition of employee under the Fair Labor Standards Act (FLSA), specifically clarifying the distinction between employees and independent contractors. The FLSA does not include a definition of “independent contractor.” The distinction is important, as the minimum wage and overtime requirements under the FLSA apply only to employees and not to independent contractors. Because there is no statutory definition, the courts and Department of Labor have used a multifactor test to determine whether a worker is an employee or an independent contractor.  However, this multifactor test has become less clear and consistent over time as courts of appeals have applied the test on a case-by-case basis, which has resulted in some inconsistency. Through this proposed regulation, the Department is seeking to clarify this test and provide more certainty.

The proposed rule adopts an “economic reality” test to determine whether a worker is an independent contractor or an employee for the purposes of the FLSA. This test has five factors – two core factors and three additional factors that can assist in making the determination.  No one factor of this test is dispositive.  However, the two “core factors” are afforded greater weight in the analysis.

The two “core factors” are: 1) the nature and degree of the worker’s control over the work, and 2) the worker’s opportunity for profit or loss based on initiative and/or investment.  The Department accords these “core factors” the most weight in this test as it considers them the most probative in determining whether in economic reality, a worker is dependent on another’s business or is in business for himself or herself.

The three additional factors are: 3) the amount of skill required for the work, 4) the degree of permanence of the working relationship between the worker and the potential employer, and 5) whether the work is part of an integrated unit of production. These factors serve as “guideposts” in evaluating a worker’s status, but are considered less than the “core factors.”

It is important to note that legal issues involving the proper designation of employee or independent contractor are broader than the FLSA.  The proper classification of whether an individual is an employee also has tax and benefit implications.   In addition, liability for “joint employers” under Title VII also presents issues for employers.  Accordingly, it is important to determine the context of the issue to determine the appropriate “test.”   If the Department of Labor changes the FLSA test, it will be interesting to see if courts consider those modifications in other contexts.

The Notice of Proposed Rulemaking for the new DOL proposed rule has already generated over 1,100 public comments. It will remain open to public comment until October 26, 2020.

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Labor and Employment – Tueth, Keeney, Cooper, Mohan & Jackstadt, P.C. has successfully represented a number of businesses, large and small, throughout the Midwest in labor and employment matters. Our broad range of experience includes employment discrimination litigation, wage-hour investigations, affirmative action revision plans development, INS audits, and a variety of traditional labor matters.

Veronica E. Potter practices primarily in the areas of higher education, litigation, and labor and employment law. Veronica represents colleges, universities, and private employers in education and employment litigation matters. Veronica started her legal career as a prosecutor, where she gained experience in all stages of litigation, including case investigation, discovery, arguing pre-trial motions, and presenting cases to both judges and juries. Prior to joining the firm, Veronica also practiced civil litigation at a large defense firm in St. Louis.