Significant Changes in Federal Definition of Employee vs. Independent Contractor Status
On September 22, 2020, the United States Department of Labor, Wage and Hour Division, published a Notice of Proposed Rulemaking (“NPRM”) that revises its independent contractor analysis under the Fair Labor Standards Act (“FLSA”). Under the proposed revision, workers who control their own work and who have a greater opportunity for profit or loss would more likely be classified as independent contractors, rather than employees.
Currently, the FLSA does not define “independent contractor”. Rather, the FLSA defines “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]), “employee” as “any individual employed by an employer” (29 U.S.C. 203[e]), and “employ” as “includ[ing] to suffer or permit to work” (29 U.S.C. 203[g]). The courts’ interpretation of “suffer or permit” has led to the consideration of a balancing test to determine whether, as a matter of economic reality, the worker is dependent on a business for work or is in business for herself. The test, however, lacks clarity and consistency in application, as the FLSA does not provide guidance on how to prioritize or balance different and sometimes competing considerations.
As the gig economy continues to grow, the issues surrounding independent contractor status are receiving increased attention. In light of the foregoing, the NPRM seeks to simplify the principles that courts use to determine whether workers are covered by the FLSA. Specifically, the NPRM proposes the following key revisions that significantly clarify how the Department of Labor distinguishes between employees and independent contractors:
- a provision explaining that independent contractors are not employees under the FLSA;
- a provision discussing the “economic reality” test for distinguishing FLSA employees from independent contractors, clarifying that the concept of economic dependence turns on whether a worker is in business for him- or herself (and, as such, is an independent contractor), or is economically dependent on a potential employer for work (and, as such, is an employee);
- provisions describing five factors examined as part of the economic reality test, including two “core” factors -- 1) the nature and degree of the worker’s control over the work, and 2) the worker’s opportunity for profit or loss -- which are to be afforded greater weight in the analysis than three other factors to be considered, which are 3) the extent the work at issue requires specialized training or skill that the potential employer does not provide; 4) the extent the work is more definite in duration or is sporadic; and 5) the extent that the work is segregable from the employer’s process in producing goods or providing services; and
- a provision advising that the parties’ actual practice is more relevant than what may be contractually or theoretically possible.
A detailed description of the proposed provisions can be found at https://www.federalregister.gov/documents/2020/09/25/2020-21018/independent-contractor-status-under-the-fair-labor-standards-act
Importantly, the NPRM would become the sole and authoritative interpretation of independent contractor status under the FLSA. The Department of Labor is accepting written comments to the NPRM through October 26, 2020. Although it obviously remains to be seen whether the NPRM will take effect, the weighted “core” factor test stands to greatly benefit companies within the gig economy which hire tens of thousands of workers who work as little or as often as they please simply by logging onto an app. Following the public comment period, there is a possibility that the NPRM will be challenged by worker advocates and state attorneys general in states such as California, New Jersey and New York where workers have been afforded greater protection under the FLSA.
Please contact Scott R. Matthews or John H. Keneally if you have any questions or concerns regarding your business’ worker classifications.
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Scott R. Matthews