On Sept. 22, 2020, the U.S. Department of Labor proposed a revision to the Fair Labor Standards Act (FLSA) that aims to clarify the independent contractor rule.ย This proposed change to the federal law may reflect or influence state labor laws such as those in California.
The FLSA currently does not define what an independent contractor is. However, it specifies that an employee is โany individual employed by an employer.โ The FLSA defines an employer as โany person acting directly or indirectly in the interest of an employer in relation to anย employee.โ
The DOLโs proposed rule indicates that a more precise interpretation of independent contractor status could distinguish independent contractors from employees more effectively, and reduce worker misclassification and litigation. It would also provide legal certainty in applying the independent contractor rule.
In a press release, DOL Secretary of Labor Eugene Scalia stated โOnce finalized, it 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.โ
What Is the Proposed Independent Contractor Rule?
The new independent contractor rule would codify and provide statutory clarification as to whether workers should be labeled as โemployeesโ or โindependent contractorsโ under the FLSA.ย
If approved, an โeconomic reality testโ would be applied to determine whether an individual is an employee or an independent contractor. The proposed โeconomic reality testโ adopts a variation of the existing factors used by the DOL and federal appellate courts, sharpening the existing test to ensure proper application.
Specifically, the โeconomic reality testโ would consider two โcore factorsโ to determine a workerโs classification as an employee or independent contractor. These would include the โnature and degree of the workerโs control over the work,โ and the โopportunity for profit or loss based on initiative and/or investmentโ to help ascertain whether a worker was in business for themselves or financially dependent upon an employer.
The rule would review other elements to help guide the analysis, including a required skill factor, the permanence of the business relationship, and โwhether the work is โpart of an integrated unit of production.โโ The test would also evaluate the actual practices of both the worker and potential employer, considering them more relevant than the contractual and theoretical possibilities to determine the workerโs economic dependence on the potential employer.
What Is the FLSA?
The Fair Labor Standards Act is a federal law that governs regulations concerning minimum wage and overtime pay. It also requires employers to keep certain records concerning employees.
Under the FLSA, most non-exempt workers employed by an FLSA covered employer must be paid at least the federal minimum wage are entitled to one and a half times their regular pay rate for time worked beyond 40 hours in a workweek. However, for workers who live in a state with a higher minimum wage, they are entitled to receive the higher wage that is providedย under state law.
Employers may be covered by the FLSA if they have at least two employees and have an annual business revenue of $500,000 or are involved in interstate commerce. Hospitals, schools, and government agencies may also be covered by the FLSA.
Who Is an Independent Contractor?
An independent contractor is generally an individual who is in business for themselves and not subject to an employerโs direct control. The IRS considers independent contractors to be those who are self-employed.
Independent contractors do not have the same overtime pay or minimum wage protections under the FLSA as those who are classified as employees, giving rise to litigation surrounding employer misclassification of employees in certain industries.
According to the DOLโs analysis, an estimated 12.3% of all workers in 2017 were independent contractors as either their primary or secondary job.
When Is an Employee Misclassified?
Misclassified employees are those who an employer classifies as independent contractors when they are actually employees who are entitled to the legal protections and benefits of the FLSA such as overtime pay and minimum wage.
Employers who misclassify employees as independent contractors and fail to provide minimum wage and overtime may be in violation of labor laws, including the FLSA, and any applicable state laws.
What Is Californiaโs Independent Contractor Rule?
California recently passed a law that sets forth a strict test to determine whether a worker is an independent contractor or an employee.
Known as the โABC test,โ three factors must each be satisfied to label an employee as an independent contractor in California. First, the worker is free from the employerโs control and direction when carrying out their work, both under contract and in performance. Second, theย individual performs work โoutside the usual course of the hiring businessโs entity.โ Lastly, the worker is also โengaged in an independently established trade, occupation, or business of the same nature as the work performed.โ
What Are My Rights as a Misclassified Employee?
If you were misclassified by your employer as an independent contractor when you were actually an employee, you may be entitled to compensation for back wages, liquidated damages, attorneys fees, and litigation costs under the FLSA. If you were wrongfully denied wages due to employee misclassification, you may be able to join an FLSA collective action to recover your damages. An experienced employment attorney can best advise you concerning your legal rights and remedies.
Join a Free California Wage & Hourย Class Action Lawsuit Investigation
If you were forced to work off the clock or without overtime pay within the past 3 years in California, you have rights โ and you donโt have to take on the company alone.
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