The U.S. Department of Labor issued a proposed rule clarifying the test for determining who is an independent contractor under the Fair Labor Standards Act (FLSA) in order to reduce worker misclassification and unnecessary litigation.
The proposed rule identifies two “core factors” and three ancillary factors:
- The two “core factors” involve 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.
- The three other factors that may serve as additional guideposts in the analysis include: 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.
The clarified “economic reality” test depends on the actual practice rather than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.
Useful, but limited impact: The rules help clarify a critical area of federal law, but unfortunately state laws are not preempted by the FLSA. If a state has a law that conflicts with the proposed rule and is more restrictive, then an employer in that state is obligated to follow the state law (e.g., California AB5).
Outlook: The public comment period will run for 30 days and DOL intends to finalize the rule before the end of the Trump administration. However, any final rule is likely to be challenged in court and could be redone or reversed by a future administration. HR Policy will be submitting comments on the proposal.