The Fair Labor Standards Act, enacted in 1938, requires – among other things – employers to pay their employees overtime for every hour worked over 40 in a workweek; this rule does not apply to individuals who work as independent contractors (IC). Over time, the guidelines for distinguishing between employees and ICs have been tweaked, adapted and interpreted, resulting in many gray areas that can have costly repercussions for employers.
In trying to remove the gray, the Department of Labor (DOL) has proposed revisions to the “tests” the employer can apply to a working relationship to more accurately determine the status of the worker. Comments were solicited on the proposed rule and the comment period expired on October 26, 2020, so we expect a final decision on the IC guidelines in the coming months.
The DOL has proposed five factors, or tests, based on “the economic realities” of the relationship. The first two tests, characterized Core Factors, have more weight than the remaining three factors. Below is a brief discussion of the five factors but keep in mind that additional, important detail is contained in the 40-page Federal Register summary.
The Core Factors are:
- The nature and degree of the individual’s control over the work performed. When a worker “exercises substantial control over key aspects of the performance of the work,” he or she may be properly categorized as an IC. This can include aspects of work, such as determining the work schedule, choosing assignments, working with little or no supervision, and being able to work for others, including an employer’s competitors. Additionally, if the means, or instruments or implements, by which the worker completes the tasks are determined by the worker, the worker would tend to be classified as an IC.
- The worker’s opportunity for profit or loss. The DOL is proposing a revision to its approach which analyzes, primarily, the worker’s investment in capital, such as tools, trucks or other equipment, as well as training or professional education, as part of the opportunity for profit or loss. Another aspect, which cannot be considered alone, is whether the worker exercises personal initiative, including managerial skill or business acumen.
The gist of these two Core Factors is whether, as a matter of economic reality, the individual is economically dependent on the potential employer for work. The remaining three factors below can serve as additional guidance for employer analysis but are secondary to the two Core Factors.
- The “Skill Required” Factor. The proposed new rule would require that if the work at issue requires specialized training or skill that the employer does not provide, this weighs in favor of IC classification.
- The ‘‘Permanence of the Working Relationship’’ Factor. ‘The degree of permanence of the working relationship between the individual and the employer is an economic reality factor under the proposed new rule.
‘Permanence of the relationship’ speaks to the continuity and duration of the relationship or length of time that a worker works for a single employer. Relationships with defined duration lean toward IC status since employment relationships are, by design, indefinite in duration or continuous. An important side-note is that the seasonal nature of some jobs does not necessarily suggest IC status, especially where the worker’s position is permanent for the duration of the relevant season and where the worker has done the same work for multiple seasons.
- The ‘‘Integrated Unit’’ Factor. If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer and less likely that the worker is in business for himself or herself. Additionally, if a worker’s tasks are the same as, or the worker’s tasks cannot be distinguished from, the tasks of acknowledged employees, that will tend to indicate employee status.
The revised DOL tests have great implications for employers who may have misclassified workers and may be operating outside the wage and hour laws. We strongly suggest that all employers: 1) read and understand the DOL’s proposed rule changes, 2) begin a review of worker relationships, using CCG’s abbreviated tool, to assess if you have misclassified workers, and 3) consult with a certified Human Resources professional or employment attorney. Do this now so you can start 2021 on the right foot and not looking over your shoulder.
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