The Department of Labor (“DOL”) proposed a new rule on September 22, 2020 to clarify the definition of employee vs. independent contractor under the Fair Labor Standards Act (“FLSA”). This distinction is particularly important as independent contractors are not employees under the FLSA and, therefore, are not subject to the FLSA’s provisions on minimum wage and overtime.
According to Secretary of Labor Eugene Scalia, “[t]he [DOL’s] proposal aims to bring clarity and consistency to the determination of who’s an independent contractor under the [FLSA],” and will “make it easier to identify employees covered by the [FLSA], while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.”
The proposed rule would adopt an “economic reality” test that considers whether a worker is in business for himself or herself (independent contractor) or is economically dependent on a putative employer for work (employee). In making this determination, the DOL identified two core factors: 1) the nature and degree of the worker’s control over the work; and 2) the worker’s opportunity for profit or loss based on initiative and/or investment. Three other factors are identified that may serve as additional guidance in the analysis: 1) the amount of skill required for the work; 2) the degree of permanence of the working relationship between the worker and the potential employer; and 3) whether the work is part of an integrated unit of production. In addition, the new proposed rule advises that the actual practice of the parties involved in more relevant than what may be contractually or theoretically possible.
Wage and Hour Division Administrator Cheryl Stanton stated that “[t]he rule proposed * * * continues [the DOL’s] work to simplify the compliance landscape for businesses and to improve conditions for workers,” and that “streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility.”
The Notice of Proposed Rulemaking was published in the Federal Register on September 25, 2020, and will be available for review and public comment for 30 days. The full text of the DOL’s new proposed rule is available here.
Employers with questions are advised to consult with their legal counsel regarding specific questions or concerns. If you have any questions, or need assistance, please feel free to contact Jeremy D. Iosue or Jason T. Hartzell at (216) 651-0451.
This Employment Law Alert may provide an overview of specific federal and/or state laws and regulations. It is not intended to be, and should not be construed as, legal advice for any particular situation or individual.
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