The U.S. Department of Labor (“DOL”) recently issued a proposed regulation to revise Title 29 of the Code of Federal Regulations to clarify the independent contractor test the DOL uses for determining whether a worker is entitled to minimum wage and/or overtime pay under the Fair Labor Standards Act (“FLSA”). Summarized below is the DOL’s proposed regulation.
By way of background, employers regularly grapple with determining whether a worker is an employee or an independent contractor. A worker who is designated as an employee is generally covered by, among other things, workers’ compensation laws and the FLSA’s minimum wage and overtime requirements, whereas independent contractors are typically excluded from coverage under the same laws. Additionally, a worker’s status as an employee or an independent contractor creates different liabilities and obligations for an employer under federal and state tax laws.
There has never been one bright-line test to assist employers with determining when a worker is an employee or an independent contractor. Instead, the answer to that question almost always depends on which agency or entity is addressing the issue. For example, while the Internal Revenue Service (“IRS”) and DOL apply different tests to make the distinction between an employee and an independent contractor, there are also many other competing and inconsistent independent contractor tests applied across federal and state courts. To address this grey area, the DOL intends to revise its interpretation of a worker’s status under the FLSA “to promote certainty for stakeholders, reduce litigation, and encourage innovation in the economy.” [Regulatory Information Number (RIN) 1235-AA34]
Presently, the FLSA provides definitions for “employer,” “employee” and “employ,” but it does not define the term “independent contractor.” The FLSA defines an “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee,” 29 U.S.C. 203(d); an “employee” as “any individual employed by an employer,” id. at 203(e); and “employ” is defined as being “suffer[ed] or permit[ted] to work,” id. at 203(g). Courts have historically viewed the “suffer and permit” standard of employment to require an evaluation of the extent of the worker’s economic dependence on his/her employer and have created a multifactor test to analyze whether a worker is an employee or an independent contractor under the FLSA. However, the focus of this analysis has generally rested on whether the worker is dependent on a particular individual, business or organization for work, or is in business for him/herself. Due to the lack of regulatory guidance and inconsistent case law pertaining to this issue, employers have been forced to find fact-specific court decisions or sub-regulatory guidance to determine on a case-by-case basis whether a worker is an employee or an independent contractor.
In response, the DOL’s proposed regulation seeks to adopt the “economic reality” test and to finally define an “independent contractor” as “a person that is in business for him/herself, rather than being economically dependent on the potential employer for work.” The proposed regulation also establishes the following five (5) factor test to assist employers with determining whether a worker should be classified as an independent contractor:
- The nature and degree of the employer’s control over the work;
- The worker’s opportunity for profit or loss based on personal initiative or investment;
- 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.
Id. The DOL’s proposed regulation seeks to provide the greatest weight to the first two (2) “core factors” as being “more probative to the question of economic dependence, or lack thereof” for purposes of determining a worker’s independent contractor status. Id. If the “core factors” are in conflict, the proposed regulation includes three (3) additional “guidepost” factors for employers to consider. These “guidepost” factors are essentially meant to support the DOL’s intent to clarify that the parties’ actual practice should be more relevant to a worker’s independent contractor status than what may be contractually or theoretically possible.
If adopted, the DOL’s regulation will become the sole authoritative interpretation for independent contractor status under the FLSA, replacing the DOL’s previous interpretations of independent contractor status applicable to tenants and sharecroppers and certain forestry and logging workers. See 29 C.F.R. 780.330(b) and 29 C.F.R. 788.16(a).