Will You Have to Reclassify Your Workforce?

On September 25, 2020, the U.S. Department of Labor published a proposed rule that may revise how an independent contractor is classified under the Fair Labor Standards Act (FLSA).

Currently. the FLSA does not specifically define the term “independent contractor.” However, this proposed rule could very well change that. The proposed rule focuses on the economic reality of each work relationship and provides 5 factors to determine if the worker is an employee or an independent contractor. The proposed rule considers a worker to be an employee if the worker is economically dependent on the hiring entity (employer). However, if the worker is in the business for themselves, then the worker would be considered an independent contractor. To determine if the worker is in business for themselves or economically dependent the Department of Labor provided a 5-factor test.

  • The Nature and Degree of the Individual’s Control over the Work. This factor targets the level of control the worker exercises over their performance and work. Some examples include setting their own schedule, selecting the projects they work on, or who they work for, which can include working for the employer’s competitors. However, requiring the worker to satisfy certain quality controls or meeting agreed-upon deadlines does not constitute control that makes a worker more or less likely to be an employee.
  • The Individual’s Opportunity for Profit or Loss. This factor views whether the worker has had an opportunity to earn profits and/or incur losses dependent on their initiative or expenditures. This includes hiring helpers, equipment or materials used to further their work.
  • The Amount of Skill Required for the Work. This factor involves whether the worker must rely on their own skills and knowledge rather than specialized training or skills provided by the hiring entity.
  • The Degree of Permanence of the Working Relationship. This factor evaluates if the working relationship is definite in duration or sporadic versus an indefinite duration or continuous by design. If the worker has a definite duration or sporadic job, then the scale would more than likely tilt towards an independent contractor. However, the Department of Labor noted that the seasonal nature of some jobs did not immediately suggest the classification as an independent contractor.
  • Whether the Work is Part of an Integrated Unit of Production. This factor weighs whether the work performed is a component or integrated part of the hiring entity’s production process or whether the work is segregable from the hiring entity’s production process. So if the worker provides services that are part of the hiring entity’s core function as long as they are not embedded in the entity’s production process, then the worker will more than likely be classified as an independent contractor.

It should be noted that the 5-factor test in the proposed rule is not to be considered exhaustive, and no single factor is dispositive. However, the Department of Labor has placed heavy consideration on the first two factors as the most probative with greater weight than any other factor. Meaning, if the worker meets the first two factors, then the other three factors become almost immaterial because they don’t always prove whether a worker is economically dependent.

After the 30-day comment period ended on October 26, 2020, we are now waiting to see if the proposed rule will become a final rule that essentially becomes the law of the land. Currently, there are 24 state attorneys general challenging the rule to block its implementation. But, if the rule does in fact take effect, its impact will be limited to the FLSA area, and it will not apply to states that use their own worker classification test. For these reasons, don’t take actions by yourself, contact your employment counsel to discuss if this proposed rule could impact your business.

You can hear more about this topic from Managing Member, at the 2020 Virtual Employment Law Update Conference presented by The Woodlands Area Chamber of Commerce in partnership with The Woodlands Bar Association. For more information visit: www.woodlandschamber.org/events/details/2020-virtual-employment-law-update-conference-11095.

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