Department of Labor proposes rule adopting “economic reality” test to assess independent contractor status

The U.S. Department of Labor (DOL) recently announced a long-awaited proposed rule that addresses how to determine whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). Under the FLSA, independent contractors are not eligible for minimum wage or overtime compensation.

The new rule proposes codifying the “economic reality” test, a multi-factor test that has been adopted in varied forms by many courts and used previously by the DOL to assess whether a worker is an employee or independent contractor. The ultimate inquiry under the economic reality test is whether the worker is dependent on the employer (an employee) or is in business for him or herself (an independent contractor).

The proposed rule “sharpens” the economic reality test by adopting the following five factors to examine:

1. The nature and degree of the worker’s control over the work (e.g., the worker’s ability to set a schedule, select projects and work for others).
2. The worker’s opportunity for profit or loss (e.g., through the exercise of personal initiative, skill, or business acumen and through investments or capital expenditures).
3. The amount of skill required for the work (e.g., whether the work requires a specialized skill or whether the worker depends on the employer for training).
4. The degree of permanence of the working relationship between the worker and the potential employer (e.g., whether the work is definite or indefinite in duration).
5. Whether the work is part of an integrated unit of production (or is segregable from the potential employer’s production process)

While no one factor is dispositive on its own, the rule states that the first two factors are “core factors” that are most probative as to whether or not a worker is an economically dependent employee and are therefore to be given greater weight in the analysis.

The public may comment on the proposed rule until October 26, 2020. Employers and individuals interested in submitting comments may do so at regulations.gov.

Employers should note that even if the rule change becomes final, employers must still comply with state and local laws regarding independent contractor classifications in the jurisdictions in which they have workers.