United States: Better Classification For Our Economic Reality

The Department of Labor (DOL) has proposed a rule that seeks to make it easier to classify workers as independent contractors. The distinction is not without difference, as the federal Fair Labor Standards Act (FLSA) and many of its state analogues only protect employees, but do not extend to independent contractors – including many gig economy workers. However, as made clear by the proposed rule, merely identifying a worker as an "independent contractor" does not mean the employer is off the hook.

The factors outlined in the new proposed rule are nothing new, and were taken from what has been called the "economic reality" test, which was developed by the courts for purposes of classifying workers under the FLSA and other labor laws. What is new, however, is the DOL's emphasis on two factors in particular, what it calls "core" factors. Those factors are (1) the nature and degree of the individual's control over the work, and (2) the individual's opportunity for profit or loss. These factors, the DOL writes, "are the most probative as to whether or not an individual is an economically dependent 'employee,'" and are afforded greater weight than any of the other factors the DOL may consider, namely (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the individual and potential employer; and (3) whether the work is part of an integrated unit of production.

With regard to the individual's control over the work, this factor weighs in favor of the individual being an independent contractor if the individual, rather than the potential employer, exercises substantial control over key aspects of performance. These key aspects include setting the individual's own schedule, selecting projects, and the individual's ability to work for others, including competitors of the potential employer. Truck drivers, for example, who have control over their own schedule and are able to work for competing companies at the same time, are likely classified as independent contractors under this particular factor. If, however, the potential employer controls the individual's scheduling or work load and requires the individual to work exclusively for that potential employer, this factor weighs in favor of classifying the individual as an employee.

Certain legal obligations, however, do not constitute control over the work for purposes of this proposed rule. For example, if the individual is required to carry insurance and meet certain deadlines, these requirements, the DOL writes, are more similar to contractual relationships between businesses and do not reflect an employment relationship.

As for the second core factor, the opportunity for profit and loss is more closely tied to the idea of being in business for oneself, and not being an economically dependent employee. This factor therefore weighs in favor of categorizing an individual as an independent contractor if he or she "has the opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen or judgment) or management of his or her investment . . . or capital expenditure." If a salesperson's profit hinges on his or her ability to increase customer volume through initiative and skill, this factor likely weighs of classification as an independent contractor. However, this factor weighs in favor of classifying an individual as an employee if the individual is unable to affect his or her earnings, or is only able to do so by working more hours or more efficiently.

If both of these core factors point toward the same classification, their combined weight usually outweighs the combined weight of other factors, discussed below, even if those factors all point toward the opposite classification. On the other hand, if the two core factors do not point toward the same classification, the remaining factors will usually determine the correct classification.

Those remaining factors, as mentioned above, are (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the individual and potential employer; and (3) whether the work is part of an integrated unit of production. First, if the work requires no specialized training or skill, or the individual relies on the potential employer to train him or her for the job, the individual is likely considered an employee under this particular factor. Second, if the working relationship is by design definite in duration, or sporadic, the "degree of permanence" factor weighs in favor of the individual being classified as an independent contractor. Seasonal work, however, does not necessarily indicate that a worker is an independent contractor. Lastly, an individual is likely an employee if his or her work is part of an integrated production process for a good or service.

The DOL's proposed rule only governs classification of a worker for federal purposes. Many state schemes may be more restrictive in what they consider an employee for purposes of their wage statutes so it is important for businesses to be aware of all of the potentially applicable tests. This is especially true of both Massachusetts and New Hampshire. Nevertheless, the proposed rule establishes a new hierarchy of factors that should create more consistency in the classification of workers as employees or independent contractors, which is particularly critical given the evolving nature of the gig economy.

The proposed rule was published on September 25, 2020. Comments on the proposed rule may be submitted for thirty days until October 26, 2020.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.