The United States Department of Labor (“DOL”) investigates complaints of alleged violations of the Fair Labor Standards Act (“FLSA”), including possible misclassification of an employee as an independent contractor. A finding of misclassification can potentially result in an employer being liable for significant taxes and penalties.

On September 22, 2020, the DOL issued a proposed rule to provide clarification in regard to the definition of an employee versus an independent contractor under the FLSA.

“The Department’s proposal aims to bring clarity and consistency to the determination of who’s an independent contractor under the Fair Labor Standards Act,” said Labor Secretary Eugene Scalia. “Once 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 proposed rule, as outlined in a press release from the DOL, provides the following:

• Adopts an “economic reality” test to determine a worker’s status as an FLSA employee or an independent contractor. The test considers whether a worker is in business for himself or herself (independent contractor) or is economically dependent on a putative employer for work (employee);
•  Identifies and explains two “core factors,” specifically the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on initiative and/or investment.  These factors help determine if a worker is economically dependent on someone else’s business or is in business for himself or herself;
• Identifies three other factors that may serve as additional guideposts in the analysis: the amount of skill required for the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work is part of an integrated unit of production; and
• Advises that the actual practice is more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.

Cheryl Stanton, who is the Wage and Hour Division Administrator with the DOL, stated, “The rule we proposed today continues our work to simplify the compliance landscape for businesses and to improve conditions for workers.” Ms. Stanton further stated, “The Department believes that streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility.”

Interested parties can submit comments on the proposed rule, which is encouraged by the DOL. The comment period runs for thirty days after the Notice of Public Rulemaking is published in the Federal Register.

It is important to note that this proposed rule will not change the definitions of independent contractor as defined by other federal and state law.