
Michael J. Sheppeard
Partner
212-784-6939 msheppeard@sh-law.comFirm Insights
Author: Michael J. Sheppeard
Date: October 8, 2020
Partner
212-784-6939 msheppeard@sh-law.comThe Department of Labor (DOL) wants to make it easier for businesses to classify workers as independent contractors. The DOL’s recently published rule proposal establishes a new framework for determining when employers may legally classify workers as independent contractors rather than employees.
“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,” Labor Secretary Eugene Scalia said in a press statement. “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 Fair Labor Standards Act (FLSA) requires covered employers to pay their non-exempt employees at least the federal minimum wage for every hour worked and overtime pay for every hour worked over 40 in a workweek. However, a worker who performs services for an individual or entity as an independent contractor is not subject to the FLSA requirements.
As discussed in prior articles, worker misclassification occurs when a bona fide, common-law employee is classified to be an “independent contractor.” In some cases, worker misclassification is intentional so as to avoid tax withholding, overtime pay and insurance requirements such as Workers Compensation and Unemployment Insurance. However, it can also occur simply because the employer misunderstands or misapplies the law. The FLSA does not define “independent contractor,” and the legal test for determining how to classify a worker varies from jurisdiction to jurisdiction.
On September 22, the DOL proposed new regulations setting forth its interpretation of the FLSA as relevant to the question whether workers are “employees” or are independent contractors under the Act. The proposed framework is an adaptation of the familiar economic reality test. Under the DOL’s proposal, the central inquiry as to whether an individual is an employee or independent contractor under the FLSA is whether, as a matter of economic reality, the individual is economically dependent on the potential employer for work.
The DOL’s proposes five factors that would guide the economic dependence analysis:
Notably, the DOL proposes that two of the factors—the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss—should be more probative of the question of economic dependence or lack thereof, and thereby afforded greater weight in the analysis than any others. As explained in the rule proposal:
As a result of their greater weight, if both core factors point towards the same classification, their combined weight is substantially likely to outweigh the combined weight of other factors that may point towards the opposite classification. In other words, where the two core factors align, the bulk of the analysis is complete. Anyone who is assessing the classification—whether a business, a worker, the Department, a court, or a jury—may approach the remaining factors and circumstances with skepticism, as only in unusual cases may such considerations outweigh the combination of the two core factors. At the same time, if the two core factors do not point toward the same classification, the remaining enumerated factors will usually determine the correct classification.
The DOL’s proposed regulations are now subject to a 30-day public comment period, which ends on October 26, 2020. As such, there may be changes before the regulations become final. If the proposed rule is finalized, it would contain the DOL’s sole and authoritative interpretation of independent contractor status under the FLSA.
The DOL’s proposed rule provides welcome guidance to New York and New Jersey businesses that use independent contractors and should help them verify that these workers are not actually employees. This is good news given that mistakes, no matter how inadvertent, can lead to costly employment lawsuits and legal penalties.
If you have any questions or if you would like to discuss the matter further, please contact me, Michael Sheppeard, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.
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