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USDOL proposes new rule to clarify independent contractor status under FLSA

September 22, 2020 - The U.S. Department of Labor today announced a proposed new rule clarifying the definition of "employee" under the Fair Labor Standards Act (FLSA) and establishing guidelines to help businesses determine whether a worker is an employee or an independent contractor under that Act.


“The Department’s proposal aims to bring clarity and consistency to the determination of who’s an independent contractor under the Fair Labor Standards Act,” said Secretary of Labor Eugene Scalia. “Once finalized, it will make it easier to identify employees covered by the Act, while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.”

Cheryl Stanton

AIM President and CEO Ray McCarty participated in a conference call today hosted by the U.S. Department of Labor. The discussion was led by Cheryl Stanton, Wage and Hour Division Administrator.


“The rule we proposed today continues our work to simplify the compliance landscape for businesses and to improve conditions for workers,” said Stanton. “The Department believes that streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility.”


During the conference call, Administrator Stanton said the USDOL is encouraging comments on the regulation from all interested parties and the public. The rule is pending publication in the Federal Register by this week or next, triggering a 30-day comment period. She said the 159-page regulation was based on court interpretations of the FLSA over time, going back to original Supreme Court analyses of factors to determine whether a person is an independent contractor or employee.


Stanton said two core factors (the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on initiative and/or investment) would be primary factors used to determine status. If those two factors do not "point in the same direction" the Department would then look to three "guideposts" for additional clarification: the amount of skill required for the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work is part of an integrated unit of production.


Stanton said the regulation is intended to "sharpen" and "refine" existing opinion letters and factors used today and did not necessarily indicate a change in policy.


One call participant representing construction contractors asked whether a safe harbor would exist if another agency (such as the IRS) makes a determination regarding a relationship. Stanton replied the IRS and DOL make their determinations based on different statutes, but suggested a comment to this effect would be welcomed during the open comment period. Another caller asked whether common factors that exist for determination would be observed between agencies and Stanton again urged the caller to submit a comment. When asked about a potential collision between the federal regulation and various state laws and regulations, Stanton said the U.S. Department of Labor must use the FLSA statutes to determine worker status and any interplay between state and federal statutes and regulations would be better addressed by Congress.


Asked if the rule will apply prospectively or if it will be retroactive, Stanton said the regulation was only a proposed rule at this time and the Department is looking forward to reviewing comments and further enhancing the regulation prior to finalization.


A representative of the NFIB noted many small businesses may need only one client or customer. She asked if this would be taken into account by the Department. Stanton replied each analysis would be based on the specific facts in each case, but in such cases more importance may be placed on the nature and control over the work - whether the person controls their own destiny or not.


The Department's proposed rule:

  • Adopts an “economic reality” test to determine a worker’s status as an FLSA employee or an independent contractor. The test considers whether a worker is in business for himself or herself (independent contractor) or is economically dependent on a putative employer for work (employee);

  • Identifies and explains two “core factors,” specifically the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on initiative and/or investment. These factors help determine if a worker is economically dependent on someone else’s business or is in business for himself or herself;

  • Identifies three other factors that may serve as additional guideposts in the analysis: the amount of skill required for the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work is part of an integrated unit of production; and

  • Advises that actual practice is more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.

This Notice of Proposed Rulemaking is available for review and public comment for 30 days after it is published in the Federal Register. The Department encourages interested parties to submit comments on the proposed rule. Today’s web posting offers the public more time to review the proposed rulemaking before the comment period begins. 


Comments may be submitted through regulations.gov for 30 days following the publication of the Notice of Proposed Rulemaking in the Federal Register.  Anyone who submits a comment (including duplicate comments) should understand and expect that the comment, including any personal information provided, will become a matter of public record and be posted without change to regulations.gov. Any comment from an individual gathered and submitted by a third-party organization as a group to the Wage and Hour Division and posted under a single document ID number on regulations.gov will likewise be posted without change, including any personal information provided.


FOR THE FULL TEXT OF THE REGULATION, CLICK HERE.


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