Independent Contractor or Not? Changes Loom on Legal Horizon with Proposed DOL Rule

Changes loom on legal horizon with proposed DOL rule

Reflecting a recent legal trend to clarify whether an individual is properly classified as an employee or independent contractor, the U.S. Department of Labor (DOL) recently issued a proposed rule to determine this status under the Fair Labor Standards Act. (FLSA)

In its proposal, the DOL has adopted an "economic reality" test to determine whether a worker is in business for himself or herself and thus is an independent contractor, or if the worker is economically dependent on an entity for work and is an employee. Emphasis on core factors

Federal and state courts have long wrestled with which factors are most determinative in reaching the end result of a worker’s legal status. To simplify this legal reasoning, the DOL would identify two core factors which would be given greater in this legal analysis.

  1. The nature and degree of the worker's control over the work.
  2. The worker's opportunity for profit or loss based on initiative or investment.

The nature and degree of the individual's control over the work suggests that an individual is an independent contractor to the extent that he or she exercises substantial control over key aspects of the performance of the work, the DOL noted. Examples of an individual's substantial control include: Setting his or her own work schedule, choosing assignments, working with little or no supervision, being able to work for others, including a potential employer's competitors.

This factor would support employee status if an employer exercises substantial control over key aspects of the work, including through requirements that the individual work for the employer exclusively during the working relationship.

The second factor--the worker's opportunity for profit or loss based on initiative or investment—would, under the proposed rule, suggest that an individual is an independent contractor if he or she has an opportunity for profit or loss on either: (1) the exercise of personal initiative, including managerial skill or business acumen or (2) the management of investments in or capital expenditure on, for example, helpers, equipment or materials.

The proposed changes to the FLSA coincide with increased legal scrutiny on both the federal and state level to adopt a more restrictive view on whether a worker is properly classified as an independent contractor. Much of this legal focus results from a greater number of individual working in the “gig’ economy where lines of what constitutes an employer-employee relationship are more blurred than in previous workplaces.

The public comment period to the DOL’s proposed rule expires in late October 2020.

The attorneys at Summers Compton and Wells are well-versed in providing legal consultation on the determination of employee versus independent contractor status.