Labor & Employment Alert: Employee or Independent Contractor? The Department of Labor Seeks to Make the Answer Easier

In a move deemed by some as a blow to workers, the Department of Labor has just issued a proposed rule to clarify whether a worker is deemed an employee for purposes of the Fair Labor Standards Act (FLSA) or an independent contractor that would not be subject to the protections of that Act. While this issue has garnered much attention in recent years given the trend of businesses hiring workers in a gig economy, it is an issue that has often proved challenging to businesses.

The proposed rule attempts to provide clarity by focusing on the “economic reality” test to determine whether a worker is an employee or an independent contractor. The test consists of five factors, two of which are considered “core factors” and carry more weight. The two core factors examine: (1) the nature and degree of the worker’s control over the work and (2) the worker’s opportunity for profit or loss based upon his or her initiative or investment. 

In other words, the core factors look at whether the worker is economically dependent on the business of another, or whether the worker is in business for himself or herself. This inquiry carries more weight for obvious reasons: if a worker is not economically dependent on the business of another, it is more likely that the worker is an independent contractor. 

Three other factors serve as additional, albeit less dispositive, guidance and take into account: (1) the amount of skill required for the work, (2) the degree of permanence of the working relationship between the worker and the potential employee, and (3) whether the work is part of an integrated unit of production. Notably, the proposed rule also states that the actual practice of what the worker does is more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.  

Although the proposed rule’s attempts at providing clarification may indeed make it harder for contract workers to claim that they are employees, the proposed rule is helpful for businesses to better understand the implications of the decision to engage non-traditional workers who do not fit into the typical “employer-employee” relationship.

As noted above, the rule is aimed at bringing clarity and consistency to the often difficult determination of whether a worker is an employee or an independent contractor. Because this is only a proposed rule at this point, there is a thirty-day (30) period for public comment before it is adopted.