Proposed DOL Rule Would Simplify Independent Contractor Status – A Little Bit

I was in Italy last week and visited Vatican City. Passport control at the Rome airport was annoyingly slow, but getting in and out of Vatican City – a sovereign nation – was surprisingly easy. Below is a photo of border control at the Vatican.

Navigating the border between independent contractor and employee status is usually more Rome airport than Vatican City, but a proposed new regulation from the Department of Labor (DOL) would make it a bit easier to support independent contractor status under the Fair Labor Standards Act (FLSA) and the Family and Medical Leave Act (FMLA).

The proposed rule would adopt a five-factor “economic reality” test, consistent with the test adopted during the first Trump administration. The defining feature of this test is that it highlights two core factors. If these two factors are met, the worker would almost always be an independent contractor under the FLSA and FMLA.

Core factor No. 1 is “The nature and degree of control over the work.” This factor weighs toward independent contractor status if the individual, not the potential employer, “exercises substantial control over key aspects of the performance of the work, such as by setting his or her own schedule, by selecting his or her projects, and/or through the ability to work for others, which might include the potential employer's competitors.”

Notably, the proposed rule makes clear that certain types of control are not considered when conducting the analysis: “Requiring the individual to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships) does not constitute control that makes the individual more or less likely to be an employee under the [FLSA].”

Core factor No. 2 is “The individual's opportunity for profit or loss.” This factor weighs toward independent contractor status when “the individual has an opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen or judgment) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work.”

The three other factors are:

• The amount of skill required for the work.  More highly skilled work suggests contractor status.
• The degree of permanence of the working relationship.Defined projects of limited duration suggest contractor status.
• Whether the work is part of an integrated unit of production.  Work that is segregable from the potential employer's production process suggests contractor status. The importance of the work is not part of this analysis.

Additional unspecified factors may also be considered, if relevant. The parties' actions – not what the contract says – are what matter most.

But how much will this rule really change things? Probably not much.

First, the rule would apply only to two laws – the FLSA and FMLA. Different tests are used for determining whether someone is an employee under federal and state tax laws, employee benefits laws, state wage and hour laws, and state workers' compensation and unemployment laws.

Second, the rule would likely apply only to DOL proceedings. The courts know how to interpret the FLSA and FMLA and do not need guidance from whatever presidential administration is in power at a given time. The courts are unlikely to grant any deference to the DOL's regulation.

Third, as of now, this is only a proposed rule. There is a public comment period that runs through April 28. At the end of the comment period, the DOL may issue a final rule. The final rule might differ somewhat from the proposed rule, but probably not by much.

There is one particularly bright spot for employers if this rule is adopted. Under 29 U.S.C. Section 259, an employer has a complete defense to an FLSA claim alleging that it failed to pay minimum wage or overtime if the employer, in good faith, relied upon and acted in conformity with a regulation.

Therefore, if the proposed rule becomes a final rule, companies retaining independent contractors should strongly consider adding text to their independent contractor agreements that indicates reliance on the new regulation. It can also be helpful in the contract to highlight facts that demonstrate conformity with the regulation, such as that the contractor determines his or her schedule, selects projects and may work for others.

For now, companies should continue to monitor the rule. If it passes, try to take advantage of the safe harbor provision in Section 259. But remember, this rule is limited in scope and does not affect a worker's status under any law other than the FLSA and FMLA. A worker can simultaneously be a contractor under one law and an employee under another.

Even if this rule is eventually adopted, and it likely will be, the final rule will not provide an easy exit from classification challenges. The rule is certainly more like exiting Vatican City than like passing through customs in Rome, but navigating misclassification claims will never be as simple as walking through a gap in the gate.

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