On September 22, 2020, the Department of Labor (the “DOL”) issued a proposed rule that would clarify whether a worker should be classified as an employee or an independent contractor under the Fair Labor Standards Act ("FLSA"). Although DOL previously adopted the economic reality test and issued guidance on such test, no formal regulation had been promulgated by the DOL to address such test prior to its issuance of this proposed rule. The DOL also stated that the new rule, once finalized, would replace the “previous industry-specific interpretations” and becomes DOL’s “sole and authoritative interpretation of independent contractor status under the FLSA.”
The DOL's proposed rule seeks to clarify its existing economic reality test by focusing on two core factors, which is consistent with the approach taken by many courts in considering a worker’s classification under the FLSA: (i) the nature and degree of the individual's control over the work, and (ii) the individual's opportunity for profit or loss. The DOL considers these two factors of greater weight than other factors, thus if both factors “point towards the same classification" as an employee or an independent contractor, then such classification is highly likely to be accurate.
Other factors considered by the proposed rule and are part of the economic reality test are the amount of skill required for the work, the degree of permanence of the working relationship between the individual and potential employer, and whether the work is part of an integrated unit of production. The proposed rule considers these factors as less probative and thus unlikely to outweigh the combined weight of the two core factors discussed above.
In addition, the proposed rule emphasizes the primacy of “actual practices”, stating that the actual practice of the worker and the potential employer is more relevant in the application of each factor than what is contractually or theoretically possible.
This proposed rule will take public comments for 30 days after its publication in the Federal Registrar, and will go into effect once the DOL publishes a final rule. Even if the proposed rule is codified as a regulation, it will only apply to contractor status under the FLSA and will not preempt state laws with a more stringent test for independent contractors.