Jessica M. Semins  |  September 29, 2020

Category: Labor & Employment

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Independent contractor rule

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.  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 “any individual employed by an employer.” The FLSA defines an employer as “any person acting directly or indirectly in the interest of an employer in relation to an employee.”

The DOL’s 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 “Once 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.”

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 “employees” or “independent contractors” under the FLSA. 

If approved, an “economic reality test” would be applied to determine whether an individual is an employee or an independent contractor. The proposed “economic reality test” 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 “economic reality test” would consider two “core factors” to determine a worker’s classification as an employee or independent contractor. These would include the “nature and degree of the worker’s control over the work,” and the “opportunity for profit or loss based on initiative and/or investment” 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 “whether the work is ‘part of an integrated unit of production.’” 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 worker’s economic dependence on the potential employer.

Independent contractor ruleWhat 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 provided 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 employer’s 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 DOL’s 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 California’s 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 “ABC test,” three factors must each be satisfied to label an employee as an independent contractor in California. First, the worker is free from the employer’s control and direction when carrying out their work, both under contract and in performance. Second, the individual performs work “outside the usual course of the hiring business’s entity.” Lastly, the worker is also “engaged in an independently established trade, occupation, or business of the same nature as the work performed.”

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.

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