DOL Proposes Independent Contractor Rule Shielding Companies from Costly Federal Misclassification Claims

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September 25, 2020
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On September 22, 2020, the Department of Labor (“DOL”) unveiled a new, proposed rule for classifying workers as either independent contractors or employees. This is important because employees are covered by the federal minimum wage and overtime law, the Fair Labor Standards Act (“FLSA”), but independent contractors are not. Therefore, independent contractors are not entitled to minimum wage or overtime. The issue of independent contractor versus employee has gained momentum recently due to the rising prevalence of companies like Uber, Lyft, and Instacart who are using independent contractors. These independent contractors have instituted a wave of lawsuits claiming that they were shorted pay or entitled to more benefits because they were performing work as employees. The new rule is yet another effort by President Trump’s administration to clarify circumstances where a company will be designated an “employer” for a particular individual for federal wage and hour laws.   

The Proposed Rule

The new rule reviews the “economic reality” between the worker and the company. It emphasizes that contractors must be in business for themselves, rather than being economically dependent on the company for work. The new rule uses a five-factor test to complete this analysis, which is different than the number of factors used by various courts, and less than the number of factors previously set forth by the DOL. For example, a California bill, which took effect last January, employs a three-part test for determining whether a worker can be classified as an independent contractor.

Although no single factor is dispositive, the DOL proposed giving greater weight to two factors, in particular (i.e., the “core factors”): the control that a worker has over his/her work and the worker’s potential for profit or loss. The control factor centers around whether a worker has the freedom to decide when to work and for how long. If a worker exercises substantial control over key aspects of his/her work (i.e. setting his/her own work schedule, choosing assignments, working with little or no supervision, or being able to work for others like a company’s competitors), then the worker is likely to be an independent contractor. If both of these factors lead towards a certain classification, then there is a strong likelihood that is the accurate classification of the worker.

The other factors are being described by the DOL as “guideposts.” These factors are analyzed when the two “core factors” are conflicting. These three factors are the amount of skill required in the work, the degree of permanence in the work relationship, and whether the work is part of an integrated unit of production. The permanence factor assesses whether the relationship is definite in duration or sporadic. The integration factor assesses whether the work requires the coordinated function of interdependent subparts working toward a specific, unified purpose.

Ramifications of the Proposed Rule

The DOL has never before proposed rules or regulations related to defining independent contractors. The Obama administration issued informal guidance with the purpose of limiting the scope of independent contractor status, but the Trump administration withdrew that guidance in June 2017. The Department of Labor Secretary Eugene Scalia said that once the rule is finalized, “it will make it easier to identify employees covered by the Act, while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.”

The comment period on the proposal will be open for 30 days once it is published in the Federal Register later this week. The DOL has high hopes for the rule – Wage and Hour Division Administrator Cheryl Stanton said that “streamlining and clarifying the test . . . [will] reduce litigation, increase efficiency, and increase job satisfaction and flexibility.”

The Trump administration hopes to finalize the rule before the end of the year. However, there is a possibility that Congress could overturn the rule under the Congressional Review Act if the Democrats sweep the House, the Senate, and the White House in the November election.

Importantly, the new rule will have no impact on state law independent contractor tests, or other independent contractor definitions under other federal laws (i.e., the National Labor Relations Board). However, the DOL has acknowledged that the proposed rule may be persuasive authority even outside the federal courts.