On September 22, 2018 the Department of Labor ("DOL") issued proposed regulations explaining how to determine whether a worker should be classified as an employee covered under the Fair Labor Standards Act ("FLSA") or an independent contractor (who is not covered by the FLSA). The proposed regulations would make it easier for companies to classify workers as independent contractors thereby eliminating their claims under FLSA (overtime and minimum wage for non-exempt employees), as well as claims under the Family Medical Leave Act and the Families First Coronavirus Relief Act, but would not impact state overtime and minimum wage laws or unemployment.

The regulations continue to use the "economic realities" test to determine a worker's proper classification, but modify the factors that go into the test. The Notice of Proposed Rulemaking explains that the ultimate inquiry is whether the worker is dependent on a particular individual, business, or organization for work and is thus an employee, or whether the worker is in business for him/herself and is thus, an independent contractor. In making this determination the DOL identifies five factors, the first two of which are considered "core" factors and the other three factors are "guideposts".

The five factors are:

1. The nature and degree of the worker's control over the work. Examples of an individual's substantial control over the work (core factor one) include: setting his/her own schedule, choosing assignments, working with little or no supervision and being able to work for others, including potential competitors (requiring an individual to comply with typical contractual terms such as requiring insurance and meeting deadlines or quality standards, are not the type of control that would likely make the worker an employee);
2. The worker's opportunity for profit and loss. This analysis is based upon (1) the exercise of personal initiative, including managerial skill or business acumen; and/or 2) the management of investments or capital expenditure on such things as helpers, equipment or material, recognizing that both employees and independent contractors likely have fewer resources than businesses;
3. The amount of skill required for the work;
4. The degree of permanence of the working relationship (indefinite and continuous relationship is an employee, definite or sporadic duration (not including seasonal work) is a contractor); and
5. Whether the work being performed is part of an integrated unit of production. The integrated unit factor is a change from the traditional "integrated factor test" previously used. The DOL explains that focusing on the importance of work to a potential employer's business is of "questionable probative value" “...[t]he integrated unit factor focuses instead on whether the work is an integrated process that requires coordinated function of interdependent subparts working towards a specific unified purpose.”

The proposed regulations are subject to a 30-day comment period. The final regulations will not go into effect until after the DOL reviews the comments submitted and publishes a final rule. We will update our blog with the latest status of the regulations.

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