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  • October 09, 2020

    Who Is an Independent Contractor? Department of Labor Proposes Clarity

    A recent rule proposed by the U.S. Department of Labor would make it easier to classify workers as independent contractors under the Fair Labor Standards Act. Lida Bannink discusses the proposed rule and its implications.

    Lida M. Bannink

    The scale continues to tip.

    On Sept. 22, 2020, the U.S. Department of Labor (DOL) issued proposed regulations aimed at “bringing clarity and consistency” in determining who is an independent contractor under the Fair Labor Standards Act (FLSA).

    Labor Secretary Eugene Scalia said in the news release that the purpose is to “make it easier to identify employees covered [by the FLSA], while also respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.”

    An Ever-changing Worker Classification

    Worker classification has been hotly contested in the recent years. The Obama administration issued guidance limiting the situations where an independent contractor relationship was appropriate. This guidance was overturned by the Trump administration in June 2017.

    The current test under the FLSA, while it varies from circuit to circuit, consists of a seemingly endless number of factors considered on a nonexclusive “totality of the circumstances” basis, including:

    • the extent to which services are an integral part of the principal’s business;

    • the permanency of the relationship, and the amount of the alleged contractor’s investment in facilities and equipment;

    • the nature and degree of control by the principal;

    • the alleged contractor’s opportunities for profit and loss;

    • the degree of skill and independent initiative to perform the work;

    • the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor; and

    • the degree of independent business organization and operation.

    The Proposed Regulation

    The new proposed regulation modifies and simplifies the factors. The test would consist of two “core factors” including:

    • the nature and degree of the worker’s control over work; and

    • the opportunity for profit or loss based on initiative and/or investment.

    In addition to the “core factors” there are three lesser factors that may serve as “guideposts” including:

    • the amount of skill required for the work;

    • the degree of permanence of the relationship; and

    • whether the work is part of an integrated unit of production.

    The proposed rule states that the two “core factors” are “most probative” to the analysis, and that if both of those factors point toward the same classification, there is “a substantial likelihood that [the classification] is … accurate,” because the other factors, which are “less probative and afforded less weight, are highly unlikely, either individually or collectively, to outweigh the combined weight of the two core factors.”

    Lida Bannink Lida Bannink, U.W. 2012, is a shareholder with Eckberg Lammers in Hudson, where she is the lead attorney in their labor and employment law group and a litigator in the business and individual law groups.

    The proposed rule explains that the “control” factor focuses more on the method and manner that work is performed than any requirement of terms typical of a contractual relationship, such as legal obligations, health and safety requirements, insurance requirements, etc.

    The “opportunity for profit or loss” refers to the ability to incur profit or a loss based on “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.” This factor will tip the scales toward employee status if the worker is “unable to affect his or her earnings or is only able to do so by working more hours or more efficiently.”

    Signifying a significant shift, the proposed regulation explains that the “integrated unit of production” factor differs “from the concept of importance or centrality of the individual’s work to the potential employer’s business.” The fact that the worker performs work that is integral to the putative employers’ business will not support employee status.

    Comments Due Oct. 26

    If finalized, this rule results in a simplification of the classification analysis and the ability for more workers to be classified, at least for FLSA purposes, as independent contractors.

    However, while this rule may be more favorable to independent contractor classification, employers are still subject to other classification tests under state and federal law that may be more narrow – so the effect of this rule may be limited.

    The public has until Oct. 26, 2020, to submit written comments to the proposed rule.

    You can submit comments on the website. The DOL reportedly plans to fast track the rule to finalize it before the end of the year or in January 2021 at the latest.

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    Labor & Employment Law Section Blog is published by the State Bar of Wisconsin; blog posts are written by section members. To contribute to this blog, contact Andrea Farrell and review Author Submission Guidelines. Learn more about the Labor & Employment Law Section or become a member.

    Disclaimer: Views presented in blog posts are those of the blog post authors, not necessarily those of the Section or the State Bar of Wisconsin. Due to the rapidly changing nature of law and our reliance on information provided by outside sources, the State Bar of Wisconsin makes no warranty or guarantee concerning the accuracy or completeness of this content.

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