DOL Proposed Rule Could Provide Clarity for FLSA Independent Contractor Status

The Department of Labor (DOL) recently issued a proposed rule that is intended to provide clarity in determining when a worker is properly classified as an independent contractor under the Fair Labor Standards Act (FLSA).

All persons who perform work are either employees or independent contractors. The differences between the two worker classifications, and the tests for determining the proper classifications, are numerous. In addition to the FLSA there is also a separate IRS test, as well as multiple and varied tests in each state, including those for unemployment, workers’ compensation, and hour and wage laws.

While classifications and tests may vary, some themes remain consistent. The often-used misnomer, “1099 employee,” for example, does not exist. All employees are issued a W-2, receive wages subject to minimum wage and overtime laws, and must be paid via payroll with appropriate withholdings. Independent contractors, however, receive a 1099, may perform services for a client or multiple clients, are paid pursuant to an agreement and only when services are performed, are paid without regard to hour and wage laws, and do not have withholding calculated for them.

Under the Fair Labor Standards Act, all workers are presumed to be employees. The employer has the burden of showing that a worker is not an employee and is properly classified as an independent contractor. Currently, there are several tests that vary by jurisdiction to determine if the worker is properly classified as an independent contractor under the FLSA based upon differing circuit court opinions.

The DOL seeks in its proposed rule to streamline the test to a five-factor “economic realities” test. This multi-factor test would focus on two core factors. First, the worker’s nature and degree of control over the work. This is sometimes referred to as the “manner and means” test and examines if the worker is able to determine how, and often when, the work is performed. Second, the DOL proposed rule would focus on the worker’s opportunity for profit and loss from the work. The DOL explained that employees are generally paid a wage or a salary for their time, while independent contractors are generally paid for a service or good, and the test is whether the worker can profit, or loose, from their initiative and investment in the work. For example, a painter who is paid by the hour earns the same amount regardless of how well they manage the project because they are paid for their time. However, a painter who bids a project that includes labor and materials, may be able to profit if they are able to reduce costs and complete the project more efficiently.

There are three additional factors that the proposed rule would also consider, all designed to help determine if a worker is economically dependent, i.e. an employee, or economically independent, i.e. an independent contractor. These remaining factors are: (i) the skill required for the work; (ii) the permanence of the working relationship; and (iii) whether the work is part of an integrated unit of production. This last factor differs from current tests regarding a worker who is “integral” to the business and instead examines the work on more specific level involved in the actual work. Similar to other DOL tests, all five factors would be assessed on the actual relationships, practices, and duties of the worker rather than any agreement between parties.

The DOL’s proposed rule is open for comment until October 26, 2020. Should the rule be enacted following the notice period, it could provide clarity and conformity on a federal level. However, employers should still be wary of varied state and local rules that govern independent contractor classification. As with minimum wage or non-exempt status, state or local laws provide different standards. For instance, California, Massachusetts, and other similar jurisdictions would likely continue to enforce their “ABC test” on a state level. This means that even if the employer met the DOL’s proposed rule, if they failed to meet the differing test under state law, the employee or a state agency could bring action against the employer under state law for improper classification.

There are serious consequences for a failure to properly classify workers as employees under federal and state law. These can include back wages, liquidated (double damages), unpaid benefits, fines, interest, and attorneys’ fees. Therefore, care should be taken when determining the proper nature of a worker’s relationship, including consultation with employment counsel when questions arise.

If you have any questions regarding the DOL’s proposed rule, or any other employment-related legal issue, please contact Leah K. Sell. Leah Sell is an Associate with Leech Tishman, and a member of the firm’s Employment & Labor, Corporate, Cannabis and LaunchPad Practice Groups. She is based in the firm’s Pittsburgh office and can be reached at 412.261.1600 or lsell@leechtishman.com. 

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