September 28, 2020

U.S. DOL Releases Draft Rule On Independent Contractor Classification

As the law firm Kelley Drye reported, the U.S. Department of Labor has released a draft rule that will alter how companies determine whether to classify an individual as an employee or as an independent contractor.

The DOL currently employs a six-factor test to assess the worker’s economic dependence on the business, including:

  • The business’s control over the workers;
  • The permanency of the relationship;
  • The workers’ investment in facilities and equipment;
  • The skill required to complete the work;
  • The opportunities for profit or loss; and
  • The extent to which the workers’ services are integrated into the business. No one factor is given more weight than any other.

The new draft rule would shift the policy to  a five-point test that focuses on two core factors: the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss based on initiative or investment. When these two factors do not align, Kelley Drye explains the following three factors would be weighed:

  • The amount of skill required for the work;
  • The degree of permanence of the working relationship; and
  • Whether the work is part of an integrated unit of production.

Kelley Drye explains, “This new test would assess whether a worker is truly in business for themselves, like a contractor, or whether they are economically dependent on their employer, as an employee. If adopted, it would make it easier for workers to be classified as independent contractors, as it no longer focuses on the control the business has over the work, but rather the worker’s control over his or her work and earnings based upon individual initiative or investment.”

Labor Secretary Eugene Scalia said, “The Department’s proposal aims to bring clarity and consistency to the determination of who’s an independent contractor under the Fair Labor Standards Act. Once finalized, it will make it easier to identify employees covered by the Act, while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.”

Kelley Drye notes that, even if the new rule adopted (again, right now it is just in draft form), it “would only apply to worker classification” under the Fair Labor Standards Act and not individual state laws. Therefore, businesses would still need to conduct a separate analysis of each independent contractor’s status as defined under state law.

The public will have 30 days to comment on the draft regulation.

According to the National Association of Manufacturers, “The rule could likely shift the employment status of millions of Americans, including many in manufacturing. If they use contractors, companies do not have to pay the minimum wage, overtime, a portion of social security taxes, or unemployment insurance and workers’ compensation insurance.”