A proposed Department of Labor (DOL) rule would simplify and clarify how to distinguish between employees and independent contractors under the Fair Labor Standards Act (FLSA). The proposal aims to ease compliance and reduce worker misclassification by making it easier for businesses to identify FLSA-covered employees. Comments on the proposal may be submitted until Oct. 26.
The FLSA requires employers to pay nonexempt employees at least the federal minimum wage for every hour worked and overtime pay for every hour worked exceeding 40 in a workweek. The law also mandates that employers keep certain employee records. However, employers do not have these FLSA requirements for independent contractors because they are not “employees” under the statute.
While the FLSA defines the terms “employer” and “employee,” the law does not define “independent contractor.” The courts and the DOL over the years have developed a multifactor test to determine whether a worker is an employee or an independent contractor under the FLSA, but the test has proven “unclear and unwieldy,” creating uncertainty. The DOL proposed rule would establish the test for classifying workers under the FLSA, with the aim of simplifying and clarifying the analysis, thereby reducing the burden on businesses.
The DOL and the courts have long taken the position that distinguishing between an employee and independent contractor requires evaluating the worker’s economic dependence on a company. Independent contractors are workers who, as a matter of economic reality, are in business for themselves — unlike employees, who are economically dependent on their employers. The proposed rule would establish an economic reality test, using five factors to determine economic dependence:
The list is not exhaustive, and no single factor would be determinative, but the two core factors would carry greater weight in the analysis. The proposal also states that actual practices would have greater weight than what might be contractually or theoretically possible.
The proposed rule would relax the parameters for determining independent contractor status under the FLSA, so employers and business lobbies will likely welcome the new test. However, different standards may apply for identifying independent contractors under other laws, such as:
For employees misclassified as independent contractors, companies will owe additional payroll taxes and might need to provide retroactive benefits. Misclassification of workers can have other unexpected consequences. For example, retirement plans sponsors might need to redo prior years’ coverage tests to reflect newly classified employees, even if those employees aren’t granted retroactive benefits.
Given the potential for litigation, the varying tests applied by other federal agencies and courts, and the divergent standards under some state laws, employers should continue to work with legal counsel to make worker determinations.