Breaking News: U.S. Department of Labor Issues Formal Regulatory Proposal Meant to Simplify the Independent Contractor vs. Employee Analysis

September 22, 2020 by

As any business owner knows, wrestling with how to classify workers can be a challenging and stressful endeavor. Jurisdictional rules vary widely and the consequences for misclassification are even greater. Moreover, workers can be reclassified by governmental agencies or by court order, regardless of contract or clear agreement between the employer and worker.

The proposed regulations, should they become finalized, make it easier to evaluate whether a worker is an independent contractor or employee.
Today the Department of Labor issued a proposed rule on independent contractor status under the Fair Labor Standards Act (FLSA). The newly proposed language is more business friendly than prior formal guidance and is meant to make it easier for workers to be properly classified. Once published, the public has 30 days to submit comments about it. Here are the key facets of the rule:

  • The Rule clarifies that independent contractors are not subject to provisions of the FLSA.
  • An individual is an employee “if, as a matter of economic reality, the individual is economically dependent on that employer for work.”
  • An individual is an independent contractor, as distinguished from an employee under the Act, if the individual is, as a matter of economic reality, in business for him- or herself.

The rule says there are 5 relevant factors in determining whether a worker is an employee versus an independent contractor, but the first 2 are “core factors” and the most probative:

  1. The nature and degree of the worker’s control over the work.
  2. The extent the individual has an opportunity to earn profits or incur losses based on his or her exercise of initiative.
  3. The amount of skill required for the work.
  4. The degree of permanence of the working relationship.
  5. Whether the worker’s work is a component of the potential employer’s integrated production process for a good or service.

Employer Takeaway

Employers should welcome today’s news. The proposed regulations, should they become finalized, make it easier to evaluate whether a worker is an independent contractor or employee, and arguably easier to classify the worker as an independent contractor should the parties desire such an approach. Pitfalls remain, however, as some states’ laws are far more strict than federal law and should be followed in specific circumstances.

Russ Brown

Russ Brown represents businesses and executives, with a focus on labor and employment law. He is regularly recognized for his legal acumen, with numerous honors as a Super Lawyer and Rising Star, and other business leadership awards from Dallas Business Journal and D Magazine. Mr. Brown co-founded Brown Fox and serves as the firm’s Managing Partner.

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Margaret Mead

Margaret Mead is a board-certified labor and employment attorney, with over two decades of experience. As a fierce litigator, she has represented clients in Texas State and federal courts and before state and federal agencies (EEOC, TWC, Department of Labor). Originally from Kansas and a KU Alumni, Ms. Mead is a Jayhawks basketball enthusiast. She enjoys attending local musical and dance performances. She also enjoys travel and scuba-diving.

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