Contractor vs Employee

Currently, there is great confusion in classifying workers as either Independent Contractors or Employees.  The U.S. Department of Labor (DOL) has long offered guidance on this topic that has been unchanged for over 60 years. Now, however, the DOL released its first-ever proposed rule outlining a test for when a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA).

There was a landmark case that spurred the DOL to create a new test to determine whether the individual is truly in business for themselves (an independent contractor) or is economically dependent on their employer for work (an employee).

Existing Guidance lists Seven “economic reality” Factors all of which are given equal weight:
1. The extent to which the services rendered are an integral part of the principal’s business.
2. The permanency of the relationship.
3. The amount of the alleged contractor’s investment in facilities and equipment.
4. The nature and degree of control by the principal.
5. The alleged contractor’s opportunities for profit and loss.
6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
7. The degree of independent business organization and operation.

The Proposed Rule is Two Core Factors and Three GuidePost Factors.
The DOL has proposed that these existing seven equal factors be replaced with two “core factors” and three “guidepost” factors. The two “core” factors are the primary factors that will be given the most, if not exclusive, weight in the analysis. The three “guidepost” factors are only to be used as tie-breakers if the analysis of the core factors does not provide a clear answer.

Core Factors:
-The nature and degree of the worker’s control over the work. If the individual exercises substantial control over key aspects of the job, this factor favors the individual being classified as an independent contractor. and;

-The individual’s investment and opportunity for profit or loss. Individuals who (a) exercise personal initiative, including through their managerial skill or business acumen, and/or (b) manage investments in, or capital expenditure on work-related materials, research, or personnel. The DOL clarifies that the “side-by-side comparison method” is abandoned in the proposed rule because individual workers will inevitably have fewer resources than businesses.

Guidepost Factors:
-The amount of specialized training or skill required for the work that the potential employer does not provide.
-The degree of permanence of the working relationship, focusing on the continuity and duration of the relationship and weighing towards independent contractor status if the relationship is definite in duration or sporadic.
-Whether the work is “part of an integrated unit of production.” The DOL has proposed to assess whether the proposed contractor’s work is “integrated” rather than “integral” to the potential employer’s business. If an individual is merely a part of a potential employer’s integrated production process, then that points to the individual being an employee, not an independent contractor. Conversely, if an individual’s work is segregable from the potential employer’s production process, that favors the individual being an independent contractor.

Because the Supreme Court last spoke to the issue nearly 60 years ago, employers and workers looking for guidance have had to piece together decisions from the
federal courts of appeal and opinion letters from the Labor Department. With this proposed rule, the DOL hopes to create a “simple, clear approach that can be applied consistently nationwide.”

At this point, the public has 30 days from the date of publication – which is 9/22/2020 – to file comments.  More information can be found here.
We will keep you updated as the timeline continues on with this ruling.

This blog post was written by Mark Izzo.

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