Independent Contractor v. Employee: DOL Releases Proposed Rule Clarifying Test for Classification of Workers

On September 22, 2020, the United States Department of Labor (DOL) released a long-awaited proposed rule (the “Proposed Rule”) providing guidance for determining employee versus independent contractor status under the Fair Labor Standards Act (FLSA).  For decades, employers have struggled with properly classifying workers, oftentimes resulting in substantial liability for, among other things, unpaid overtime and unpaid payroll taxes.  If adopted, the Proposed Rule may make it easier for employers to classify workers as independent contractors.

Background and the Need for Rulemaking

While the employee versus independent contractor debate has garnered significant attention over the years as more workers desire the flexibility that comes with contractor status, the DOL has never promulgated a formal regulation addressing the matter.  Instead, since 1954, the DOL has issued and revised guidance based upon a multifactor “economic reality” test, which focuses on the economic independence of the worker.  This evolving guidance, mostly issued through opinion letters, has often been anything but clear.

The Proposed Rule critiqued the DOL’s prior guidance on the issue as follows:

First, the test’s overarching concept of “economic dependence” is under-developed and sometimes inconsistently applied, rendering it a source of confusion. Second, the test is indefinite and amorphous in that it makes all facts potentially relevant without providing any guidance on how to prioritize or balance different and sometimes competing considerations. Third, inefficiency and lack of structure in the test further stem from blurred boundaries between the factors. Fourth, these shortcomings have become more apparent over time as technology, economic conditions, and work relationships have evolved.

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