The Department of Labor recently issued a new proposed rule distinguishing between employees, who are covered by the Fair Labor Standards Act, and independent contractors, who are not. This follows on the heels of a rule issued by the previous administration on the same topic, which has now been repealed. The previous rule elevated two factors (control and opportunity for profit or loss) as “core” factors above other factors in determining workers’ economic dependence on their employer, and slightly favored a finding of independent contractor status. The current proposed rule returns to a balanced review of factors, and is more geared to finding employee status, as the DOL expressly wants to ensure that workers are not deprived of their rights under the FLSA.

Per the DOL’s report of the new proposed rule, “The ultimate inquiry is whether, as a matter of economic reality, the worker is either economically dependent on the employer for work (and is thus an employee) or is in business for themself (and is thus an independent contractor).” Each of the six factors identified by the DOL is to be viewed under this framework.

The six factors are:

1. “Opportunity for profit or loss depending on managerial skill.” Does the worker do things like produce advertising, negotiate contracts, and decide which jobs to perform? These reflect the actions of someone who works for themself.

2. “Investments by the worker and the employer.” Has the worker made significant “capital or entrepreneurial” investments in the work? Small costs for special tools are not enough to transform a worker into an independent contractor.

3. “Degree of permanence of the work relationship.” In light of the current “gig economy”, the DOL notes that interrupted work relationships can still be employer-employee relationships if they arise from the nature of the business.

4. “Nature and degree of control.” In this world of remote work and less direct supervision, the DOL de-emphasizes those factors and focuses more on things like who sets prices for the work, whether the employer restricts a worker’s ability to work for others, and whether the employer ensures the worker’s compliance with legal, safety, or quality control obligations. The analysis focuses on whether the employer still retains enough control over meaningful economic aspects of the work relationship to negate the inference that the worker is running their own business.

5. “Extent to which the work performed is an integral part of the employer’s business.” The DOL presumes that core operations are more likely to be staffed by employees.

6. “Skill and initiative.” Lack of specialized skills often indicates employee status, but the presence of specialized skills may not reflect independent contractor status unless the skills are used to enhance the worker’s business, i.e., include “business-like initiative.”

Employers need to assess whether contractors who provide them services might be considered employees under the new rule, if it is codified in its present form.

Contact Stokes Wagner if you have any questions.

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THIS DOCUMENT PROVIDES A GENERAL SUMMARY AND IS FOR INFORMATIONAL/EDUCATIONAL PURPOSES ONLY. IT IS NOT INTENDED TO BE COMPREHENSIVE, NOR DOES IT CONSTITUTE LEGAL ADVICE. PLEASE CONSULT WITH COUNSEL BEFORE TAKING OR REFRAINING FROM TAKING ANY ACTION.