U.S. DOL Proposes New Rule for Determining Independent Contractor Status

October 14, 2020

Last month the U.S. Department of Labor (DOL) released a proposed rule that, if made final, will provide guidance to employers for determining whether a worker can properly be classified as an independent contractor for purposes of the Fair Labor Standards Act (FLSA). As many employers know, misclassifying a worker as an independent contractor can be a costly mistake, resulting in liability for unpaid payroll taxes, unpaid overtime, penalties, and attorney fees. If the proposed rule is adopted, it will provide needed guidance and might also make it easier to classify some workers as independent contractors.

The DOL proposes to simplify the existing “economic reality” test for determining whether the worker is actually in business for himself or is economically dependent on the employer. To assist in making this determination, the proposed rule will “Identify and explain two ‘core factors,’ specifically: the nature and degree of the worker’s control over the work; and the worker’s opportunity for profit or loss based on initiative and/or investment.”

If application of the core factors does not resolve the question, three more factors would be used as “additional guideposts.” The additional factors are:

1. The amount of skill required for the work;

2. The degree of permanence of the working relationship between the worker and the potential employer, and;

3. Whether the work is part of an integrated unit of production.

The DOL is accepting comments from the public on the proposed rule. After reviewing the comments, the DOL might make revisions to the rule before finalizing it. Alternatively, the DOL could finalize the rule as currently written, or not promulgate the rule at all. As written, the proposed rule would give employers and workers more flexibility in structuring their relationship for purposes of federal wage and hour laws.

Bear in mind, however, that the proposed rule would not affect the determination of whether a worker is an independent contractor under other laws. For example, the Internal Revenue Service uses a list of 20 factors to evaluate whether a worker treated as an independent contractor truly qualifies as one for federal tax purposes. Colorado’s Employment Security Act and workers’ compensation statute contain their own factors, and there are other tests used in other contexts.

The U.S. DOL’s website provides information on the proposed rule here. At the bottom of that page is a link to the proposed rule, and the DOL’s discussion of it, as published in the Federal Register.