By: William H. Andrews, Of Counsel
The U.S. Department of Labor published a proposed rule in the Federal Register on September 25, 2020 to clarify whether a worker is or is not an independent contract. Part 756, Title 29 Code of Federal Regulations, is entitled “Employee or Independent Contractor Status Under the Fair Labor Standards Act.” Before the proposed rule becomes final, the regulations are subject to a thirty day comment period which expires on October 26, 2020. To the extent that prior administrative rulings, interpretations, practices, or enforcement policies relating to classification as employer or independent contractor under the FLSA are inconsistent or conflict with Part 795, they are rescinded. Reliance on Part 795 also serves as a “safe harbor” defense to liability and liquidated damages under the FLSA.
“Economic dependence” is the ultimate inquiry as to whether a worker is or is not an employee or an independent contractor. In making such a determination, the DOL will consider the following in determining independent contractor status, the first two being the most probative:
- The nature and degree of the potential employers control. A business may have control where it, for example, it requires a worker to work exclusively for the business; disavows working for or interacting with competitors during the working relationship. Examples in the proposed regulatory text of an individual’s substantial control includes setting his or her own work schedule, choosing assignments, working with little or no supervision, and being able to work for others, including a potential employer’s competitors.
- Opportunity for profit and loss. These opportunities typically exist where the worker receives additional compensation based, not on greater efficiency, but on exercise of initiative, judgment, or foresight; has flexibility to negotiate compensation throughout the working relationship; or has capital expenditure at risk in the job.
- Skill, initiative, judgment and foresight required. This factor weighs in favor of the individual being an independent contractor to the extent that the work at issue requires specialized training or skill that the employer does not provide.
- Permanency of relation. Permanency arises where a business, for example, requires a worker to agree to a fixed term of work; disavow working for or interacting with competitors after the working relationship ends; or otherwise raise restrictions on or sanctions for leaving the job in order to pursue external economic opportunities, among others.
- The Integrated Unit Factor. A worker’s services are integrated into a business if they form the “primary purpose” of that business. Under this articulation, the “integral part” factor considers the importance of the services rendered to the company’s business. This factor generally favors employee status if the work performed is so important that it is central to or at the heart of the employer’s business.
- Investment in facilities, equipment or helpers. The capital investment factor the most significant if it reveals that the workers performs a specialized service that requires a tool or application which he owns and has mastered or that the worker is simply using implements of the company to accomplish the task.
The proposed regulations explain that the two core factors, control and opportunity for proffered loss, are each afforded more weight in the analysis of economic independence than are the others. As a result of the greater weight, if both core factors point towards the same classification, their combined weight is substantially likely to outweigh the combined weight of the other factors that may point towards the opposite classification.
In summary, most commentators who have studied the proposed regulations feel that the regulations provide a relaxed framework for employers to classify workers as independent contractors when compared to current case law. If you would like to discuss how these proposed regulations effect the manner in which you classify workers, please contact the Labor and Employment Law attorney which you normally consult, or any member of the GrayRobinson Labor and Employment Law team.
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