On September 22, 2020, the Department of Labor (DOL) announced a new proposed rule that would, if it becomes final, change the test the DOL uses to determine if a worker is an “independent contractor” or an “employee” under the Fair Labor Standards Act (FLSA). The result of this proposed rule change will inevitably be that thousands of employees will be reclassified as independent contractors under the FLSA. The FLSA is the federal law mandates employers to pay their employees minimum wage, overtime for time worked over 40 hours, and other record keeping requirements. My goal is to provide a brief overview of the new proposed changes and hidden dangers in the DOL’s proposed rule change.
Current method of classifying workers as either employees or independent contractors.
To date, the DOL has never promulgated or codified a method or test to aid in the determination of whether a worker was an independent contractor or an employee. Instead, an unwieldy patchwork of court decisions and internal guidance have left the public with more questions than answers. For example, the National Labor Relations Board, the Internal Revenue Service, and courts across the country all apply different tests to determine whether a worker is an employee or an independent contractor.
For the most part, the DOL has adopted what can be considered the economic reality test. In short, this test is made up of a large number of factors, which include, but are not limited to:
- The extent to which the services rendered are an integral part of the principal’s business;
- The permanency of the relationship;
- The amount of the alleged contractor’s investment in facilities and equipment;
- The nature and degree of control by the principal;
- The alleged contractor’s opportunities for profit and loss;
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor; and
- The degree of independent business organization and operation.
It is fair to note that no single factor is dispositive, and thus, one must take into account the total activity or situation. Due to the large number of factors and the vague guidance this test has led to unpredictable and often erroneous results.
The DOL’s proposed rule change and the effects it will have on the classifications of workers.
In its September 2020 proposed rule change, the DOL appears to have provided some needed clarification. Unfortunately, the way that this change will pan out will most likely lead many employees to be wrongly classified as independent workers.
The new test will still have the same name as its predecessor but with a few major distinctions. First, it will consist of only five factors. These five factors will be further divided up into two groups. First, the “core factors,” which are:
- 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.
Second, the guidepost factors, which are:
- The amount of skill required for the work;
- The degree of permanence of the working relationship between the worker and the potential employer; and
- Whether the work is part of an integrated unit of production.
The “core factors” will weigh the heaviest on the ultimate answer. While the guidepost factors will only serve as guides in case the first two factors are unable to be determinative.
While this change may appear to be benign, it has the potential to deprive thousands of employees of their FLSA rights. This is because of the disproportionate weight that is given to the “core factors.” Indeed, workers that have an ability to set their own schedule and work for a competitor are now in danger of being possibly reclassified as an independent contractor. This is especially pertinent since the current rise in the gig economy. Moreover, the second “core factor” appears to signal that managerial employees who use their skill and experience to increase the profits of the company may now also be in danger of being classified as independent contractors.
Being misclassified can lead to you not being paid overtime or minimum wage. If you believe you have been misclassified as an independent contractor, it is important to get an opinion from an attorney that is experienced in employment law. At our law office we specialize in employment law. Contact a Texas Employment Lawyer today to set up a consultation.