Compliance News | October 12, 2020

Independent Contractor or Employee? DOL Proposed Rule

The DOL has released a proposed rule that would provide a framework for employers to use to determine whether a worker should be classified as an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The proposed rule would affect an employer’s obligations under the FLSA, including whether a worker is entitled to a minimum wage or overtime pay. The proposal would create a new method for classifying workers, which may be particularly important to so-called gig economy workers.

Comments on the proposed rule are due by October 26, 2020.

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The proposed DOL test

The DOL test in the proposed rule provides that an individual is an employee if, as a matter of economic reality, the individual is economically dependent on that employer for work. There are two core factors which would have to be considered under the economic reality test:

  • The nature and degree of the individual’s control over work
  • The individual’s opportunity for profit or loss

If both factors point towards the same classification, whether employee or independent contractor, there is a substantial likelihood that would be considered the accurate classification for the worker.

There are three additional factors that are less likely to outweigh the combined weight of the first two factors but would be considered:

  • The amount of skill required for the work
  • The degree of permanence of the working relationship between the individual and the potential employer
  • Whether the work is part of an integrated unit of production

The proposed DOL rule would be applicable only under the FLSA. It would not affect state overtime and wage and hour laws, such as the ABC test used in California.

Notably, the DOL proposed rule is different from other rules determining whether a worker is an employee, including state wage and hour laws, and the Internal Revenue Service’s tests to determine whether an individual is an employee for purposes of withholding taxes, withholding and paying Social Security and Medicare taxes, and paying unemployment taxes on wages.

What happens next?

Once comments are received by October 26, 2020, the DOL will consider them in accordance with standard notice-and-comment rulemaking, and publish a final rule. It is unclear whether there will be sufficient time for the rule to be published by Inauguration Day in January 2021. If it is not, and there is a new administration, that administration may or may not continue to pursue the new rule.

In addition, if the rule is published late in the current administration, it could be subject to review under the Congressional Review Act. The final rule may also be subject to litigation.

Have questions about the implications of the proposed rule for your workers?

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.

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