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Department of Labor’s New Guidance for Independent Contractors

by | Oct 28, 2020 | Business & Commercial Law

On September 25, 2020, the U.S. Department of Labor (“Department”) announced proposed revisions to its interpretation of independent contractor status under the Fair Labor Standards Act (“FLSA’ or “Act”). The stated purpose of these revisions is to promote certainty for stakeholders, reduce litigation, and encourage innovation in the economy.

Independent contractors are not considered “employees” under the FLSA and as a result they are not subject to minimum wage or overtime work requirements like employees. The proposed guidelines take a economic dependence approach to defining who is an independent contract and who is an employee. Those who are dependent on an employer for work are defined as employees whereas those who, as a matter of economic reality, are in business for themselves as opposed to being economically dependent on the potential employer for work are independent contractors.

The proposed regulations provide some guiding factors to determine the difference between independent contractors and employees:

1. The “Nature and Degree of the Individual’s Control Over the Work”

Some considerations under this assessment factor are:

– Does the worker set her own schedule?
– Does the worker have the ability to select her own projects?
– Can the worker work for an employer’s competitor?

If the worker answer yes to all or most of these, they are likely an independent contractor and not an employee. However, the regulations clarify that requirements for workers to comply with legal, health and safety obligations, or meet quality standards and perform on typical contractual conditions such as carrying insurance or meeting deadlines, are not relevant under the “Nature and Degree of Control” factor.

2. The ‘‘Opportunity for Profit or Loss’’

This factor looks at whether the worker has the ability to change her earnings through work initiative that is not based solely on working more hours. For example, can the worker invest in the business to increase profits? If an investment fails, does the worker suffer the loss directly? Affirmative answers to these questions point to an independent contractor designation.

3. The ‘‘Skill Required’’

For this factor, the proposed regulations focus on the amount of skill required for the work. If a high degree of specialized training or skill is required and is not provided by the employer, the worker is more likely to be an independent contractor. If the employer does provide the specialized training or skill required for the job then the worker is more likely to be an employee.

4. The ‘‘Permanence of the Working Relationship’’

This factor looks at whether the relationship between the employer and worker is limited in duration or sporadic (independent contractor) or indefinite and continuous (employee). However, there is a clear distinction made with regard to seasonal workers where the position is permanent for the season or the worker has worked for the employer for many seasons. These factors point to an employer-employee relationship. Exclusivity of the working relationship is not to be considered under this factor.

5. The ‘‘Integrated Unit’’

This factors looks at the degree of integration of the work with the employer’s “integrated unit of production.” The factor weighs in favor of the employee designation for workers where the worker is part of an integrated process that requires the coordinated efforts of interdependent parts working together towards a common goal. An independent contractor on the other hand would be able to perform her work independently of the employer’s production process.

Under the proposed legislation two of these factors, control and opportunity for profit or loss, are afforded more weight than the other three factors. If both of these core factors point to the same designation they outweigh the combined effect of the other three factors.

This proposed regulations would be the Department’s sole and authoritative interpretation of independent contractor status under the FLSA. The Department hopes the new regulations will clarify the distinction between employees and independent contractors under the Act for all stakeholders.