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U.S. Labor Department Proposes Definition of Independent Contractors

    Client Alerts
  • September 24, 2020

On Tuesday, the federal Department of Labor issued proposed regulations defining the difference between employees and independent contractors under the Fair Labor Standards Act. If finalized and deferred to by courts, these definitions would set clearer boundaries on which workers are entitled to protection under overtime and minimum wage laws.

In its proposal, DOL states that the question of employment status will be determined using an “economic reality” test. This test uses five factors to determine whether workers are in business for themselves, or whether they are dependent on a company for work. Of the five factors, the first two are considered primary, with the remaining three considered additional elements to review in closer cases:

1. The nature and degree of the worker’s control over the work.

2. The worker’s opportunity for profit/loss based on initiative or investment.

3. The amount of skill required for the work.

4. The relative permanence of the working relationship.

5. Whether the work is part of an integrated unit of production.

Importantly, the rules focus on the actual relationship between the parties, and not what is contractually or theoretically possible. The economic reality test has been used by DOL and federal courts for decades. However, the test has included analysis of different factors, with varying weight applied to each depending on the forum. DOL stated its intent to standardize this analysis to eliminate uncertainty when classifying workers.

If finalized, the regulations should modestly expand the categories of workers as independent contractors not subject to FLSA requirements. This proposal would not directly affect the employee/independent contractor classification under a variety of other state and federal laws. DOL is only providing a 30-day notice and comment period for the new regulations and stated its intent to issue final rules by the end of 2020.