The United States Department of Labor (DOL) recently proposed a new rule that would change the interpretation of independent contractor status under the Fair Labor Standards Act (“FLSA”). If finalized, the DOL suggests the proposed rule would promote certainty for companies, reduce opportunity for employee litigation, and encourage innovation in the economy.
The proposed rule focuses on a five-factor test that examines the “economic reality” of the relationship between a worker and a company. However, it highlights two “core factors” that are the “most probative” and should be “afforded greater weight,” which are listed below:
- the nature and degree of the individual’s control over their work; and
- The worker’s opportunity for profit and loss.
Emphasizing these two factors will change how courts previously examined the issue. The DOL notes that it chose to highlight these factors as they are key to whether someone is in business for themselves or reliant on a bigger company to render service. In addition, these factors look at whether a worker has the freedom to decide when to work and for how long.
BACKGROUND ON THE NEW RULE
Under the FLSA, employers are required to pay non-exempt employees no less than the federal minimum hourly wage for all hours worked and overtime for any hours worked over 40 per week. However, the Supreme Court states that independent contractors are not granted such rights despite that the term “independent contractor” is not defined under the FLSA.
Instead, Courts and the DOL have long interpreted what the definition of “employ” really means—as stated in the text as “to suffer or permit to work” 29 U.S.C. § 203(g). Over the years, the Courts and the DOL have developed both similar and varying standards and factors to determine whether an individual is an employee or an independent contractor: These typically have focused on factors that speak to the “economic reality” of the relationship between the employer and the individual.
For example, in the case United States v. Silk, the Supreme court addressed the distinction between employees and independent contractors under the Social Security Act (SSA) [331 U.S. 704 (1947)]. On the same day, the Supreme Court presented the case Rutherford Food Corp. v. McComb, which stated that “decisions that define the coverage of the employer-employee relationship under the [NLRA and the SSA]are persuasive in the consideration of a similar coverage under the [FLSA]” 331 U.S 772 (1947).
The six factors addressed include the following listed below.
- the employer’s versus the individual’s degree of control over the work
- the individual’s opportunity for profit or loss
- the individual’s investment in facilities and equipment
- the permanency of the relationship between the parties
- the skill or expertise required by the individual and
- whether the work is “part of an integrated unit of product.”
The DOL noted that since these decisions, Federal courts and the DOL have inconsistently applied these factors—sometimes reaching opposite conclusions based on essentially the same facts. For example, the DOL noted that a panel of the U.S. Court of Appeals for the Fifth Circuit held that cable splicers hired as independent contractors by BellSouth to provide post-Hurricane Katrina repairs were actually employees. Cromwell v. Driftwood Elec. Contractor Inc., 348 Fed Appx. 57 (5th Cir. 2009). However, in a case involving essentially the same relevant facts in another case before the Fifth Circuit, the opposite conclusion was reached. See Thibault vs. BellSouth Telecommunications, 612 F.3d 843 (5th Cir. 2010).
In light of this history, the recently proposed rule seeks to streamline the application of the factors and guide the inquiry by providing a more detailed discussion of how to apply these factors. While all Circuits already employ some version of the “economic reality” test, DOL regulations have not previously identified any factors as requiring more or less weight than the others.
The rule builds on worker classification tests that have been developed over decades since the FLSA was originally enacted. Comments for the proposed regulation must be submitted by Oct. 26, 2020.
The emphasis on these two factors could be particularly important for the gig economy, if finalized. What the potential impact could mean remains to be seen. Stay tuned for more information.