SUMMARY

 

The DOL has proposed a new rule to help clarify when someone is an “independent contractor.” The new rule would employ an economic dependence test to classify employees versus independent contractors. At bottom, it would assess the person’s “nature and degree of control” over the work as well as his or her “opportunity for profit or loss.” The rule would also allow other factors to be considered in determining status, such as the skill required for the work, the permanence of the working relationship, and whether the work is part of an integrated unit of production.

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ANALYSIS

The Department of Labor’s proposed rule §795.105 - “Determining employee and independent contractor classification under the FLSA” – in effect takes the debate over when someone is an employee versus being an independent contractor back to an approach that was put forward during the first Trump administration. Under the proposed rule, an individual who renders services to a potential employer “as an independent contractor” is not that potential employer’s “employee.”[1]

The proposed rule makes “economic dependence” the central inquiry in determining whether someone is an independent contractor or an employee. “Economic dependence” in this context means the “dependence that a typical employee has on an employer for work, as opposed to an individual who has more of the nature and character of a business owner who has a separate business.” Importantly, the rule notes that “economic dependence does not focus on the amount of income the worker earns, or whether the worker has other sources of income.”

There are two core factors that are identified as probative as to whether or not an individual is an economically dependent “employee.” According to the rule as proposed, if both point towards the same classification, there is a “substantial likelihood” that such is the individual’s accurate classification. The “core factors” are: (i) the nature and degree of control over the work; and (ii) the individual’s opportunity for profit or loss.

While still only a proposed rule, the DOL’s approach hearkens back to one that surfaced during the prior Trump administration and should ease concerns raised by a more recent Biden Administration version that was viewed as more likely to cause financial professionals under a 1099 model to be labelled employees.

(i) “Nature and degree of control over work” -- this factor weighs towards an individual being an independent contractor to the extent the individual… “exercises substantial control over key aspects of the performance of the work, such as by setting his or her own schedule, by selecting his or her projects, and/or through the ability to work for others, which might include the potential employer’s competitors.” In contrast, this factor weighs in favor of the individual being an employee to the extent the potential employer “exercises substantial control over key aspects of the performance of the work, such as by controlling the individual’s schedule or workload and/or by directly or indirectly requiring the individual to work exclusively for the potential employer.”

 

It is worth noting that the proposed rule clearly acknowledges that “requiring the individual to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses”… “does not constitute control that makes the individual more or less likely to be an employee…”

 

(ii) “Opportunity for profit or loss” - this factor weighs towards the individual being an independent contractor to the extent the individual has an opportunity to earn profits or incur losses “based on his or her exercise of initiative or management of his or her investment in or capital expenditure on helpers or equipment or material to further his or her work.” This factor weighs toward the individual being an employee, on the other hand, “to the extent the individual is unable to affect his or her earnings or is only able to do so by working more hours or faster.”

 

Other enumerated factors include: (i) the amount of skill required for the work; (ii) the degree of permanence of the working relationship between the individual and the potential employer; and (iii) whether the work is part of an integrated unit of production.

 

Importantly, the proposed rule acknowledges that the individual “does not need to have an opportunity for profit or loss based on both for this factor to weigh towards the individual being an independent contractor.”

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As part of the proposed rulemaking package, the Department included an interpretive provision stating, in effect, that in applying these factors, the actual practice of the parties involved is “more relevant” than what may be contractually or theoretically possible.

 

[1] From a definitional standpoint, applicable law defines an employee as “an individual whom an employer suffers, permits, or otherwise employs to work,” while an independent contractor is defined “as a matter of economic reality,” as being in business “for him- or herself.”