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DOL Proposes “Economic Reality” Test to Help Determine Status of Workers

September 22, 2020

The U.S. Department of Labor (the “DOL”) just proposed new regulations that, if implemented, would make it easier for employers to classify workers as independent contractors (rather than employees).  Such a classification would remove these workers from the purview of the Fair Labor Standards Act (the “FLSA”), thereby eliminating a variety of workplace protections, including minimum wage and overtime pay (click here to read the DOL summary).  This move is in stark contrast to recent legislation passed in California (Assembly Bill 5) and the recent California court decision, which if upheld will reclassify Uber and Lyft drivers as employees (Click here to read a recent Brody and Associates article on California’s A.B. 5 and Uber Lawsuit). The DOL hopes this new regulation 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.”

The proposed regulation offers the newest version of the “Economic Reality” Test to determine a workers status as an employee or independent contractor.  The test uses two steps to evaluate if the worker is economically dependent on the “employer” making him an employee or if the worker is truly in business for him/herself and as such is an independent contractor.  The first step considers  two key factors:

  • The nature and degree of the worker’s control over the work (e.g. is the worker free to set his own schedule, choose to accept or reject a given job assignment, and work independently including for a competitor); and
  • The worker’s opportunity for profit or loss based on the worker’s own initiative or investment including the use of personal initiative, business acumen or personal investment in the business to get ahead.

If after applying the first step, the worker’s status remains unclear, the regulation offers three secondary factors to help determine how the worker should be classified.  However, the DOL stressed that if the two points listed in  the first step both point towards the same classification, then their combined weight will most likely outweigh all the secondary factors.

These secondary factors evaluate:

  • the amount of skill required to perform the work;
  • the degree of permanence of the working relationship between the worker and the potential employer; and
  • whether the work is an integrated part of the hiring copany’s production process.

The proposed regulation stands as the DOL’s first official stance on this topic since President Trump took office and is much more employer friendly than the Obama administration’s prior approach and California’s A.B. 5.  The DOL is fast tracking the proposed regulations with the hopes of having it finalized and in place before the Presidential inauguration.

At last Tuesday’s news conference, the DOL made clear that this new regulation would not supersede worker-friendly state independent-contractor laws, “If a state has a law that conflicts with how we have interpreted the Fair Labor Standards Act, and that is a more strict law, then the employer in that state would be obligated to apply the more strict [state] law.”  This would mean that California’s A.B. 5 would prevail in California.

he U.S. Department of Labor (DOL) issued a proposed rule Sept. 22 to clarify when a worker is an employee covered by the Fair Labor Standards Act (FLSA) or an independent contractor. Independent contractors, including many gig-economy workers, are not eligible for minimum wage, overtime and other benefits that employees must receive. The proposed rule adopts an “economic reality” test to determine a worker’s status as an FLSA employee or independent contractor.

There will be a 30-day comment period after the proposed rule’s official publication in the Federal Register