Department of Labor Proposes New Framework to Help Employers Classify Workers
On January 6, 2021, the U.S. Department of Labor (“DOL”) proposed a new framework to help employers determine whether workers are employees or independent contractors for purposes of the Fair Labor Standards Act (“FLSA”).
The DOL’s framework adopts an “economic realities” test to determine a worker’s status. Under that test, workers should be classified as independent contractors only if, as a matter of economic reality, they are in business for themselves as opposed to being economically dependent on the potential employer for work.
The economic realities test focuses on the concept of economic dependence. The inquiry into economic dependence is conducted by applying five factors, none of which is determinative of a worker’s status by itself. The five factors are as follows:
- The nature and degree of the worker’s control over the work;
- The worker’s opportunity for profit or loss;
- The amount of skill required for the position;
- The permanence of the working relationship; and
- How integrated the worker’s role is to the organization’s overall operation.
The DOL explains that the first two factors—the worker’s control and opportunity for profit or loss—are more probative of economic dependence (or lack thereof) than the other factors, and therefore carry more weight. In other words, if these two “core” factors point toward the same classification—whether employee or independent contractor—there is a substantial likelihood that the classification is appropriate.
The nature and degree of the worker’s control over the work. The first factor weighs toward a worker being an independent contractor if the worker, as opposed to the potential employer, exercises substantial control over key aspects of his/her performance of the work, such as by setting his/her own schedule, selecting his/her projects, and having the ability to work for others, including the potential employer’s competitors. By contrast, this factor weighs in favor of the worker being an employee if the potential employer exercises substantial control over key aspects of the worker’s performance of the work, such as by controlling the worker’s schedule or workload, and by directly or indirectly requiring the worker to work exclusively for the potential employer.
The worker’s opportunity for profit or loss. The second factor weighs toward a worker being an independent contractor if the worker has an opportunity to earn profits or incur losses based on his/her exercise of initiative (e.g. managerial skill or business acumen or judgment) or management of his/her investment in or capital expenditure on, for example, helpers or equipment or material to further his/her work. On the other hand, this factor points toward employee status if the worker is unable to affect his/her earnings or is only able to do so by working more hours or more efficiently.
The remaining three factors are helpful when the first two factors do not point to the same conclusion. These “guidepost” factors indicate that a worker is likely an independent contractor to the extent that: (a) the work requires specialized training or skills that the potential employer does not provide; (b) the work relationship between the worker and the potential employer is definite in duration or sporadic, which may include regularly occurring fixed periods of work; or (c) the worker’s work is segregable from the potential employer’s production process.
Also important for employers to consider when classifying workers is that the offering of health, retirement, and other benefits is not necessarily dispositive of employment status. The DOL clarifies, however, that providing a worker with the same benefits on the terms that an employer also gives its own employees may indicate that the worker is an employee rather than an independent contractor. Further, the provision of certain other benefits, such as sick or other paid leave, may also suggest employee status. Therefore, employers who decide to extend benefits to independent contractors must be mindful of how those benefits compare to those being offered to employees, as the benefits may inadvertently change an independent contractor into an employee.
Ultimately, the DOL’s new framework, which is expected to take effect on March 8, 2021, should give employers more certainty when hiring or engaging workers and ideally assist in avoiding FLSA violations based on worker classification.
Employers operating in Maryland should understand that the DOL’s framework, when effective, will operate in tandem with Maryland’s Workplace Fraud Act (“MDWFA”). The MDWFA generally presumes that a worker is an employee unless the employer proves otherwise, and imposes civil penalties for employers who misclassify employees.
The information in this article was derived from: Department of Labor, Wage and Hour Division; Independent Contractor Status Under the Fair Labor Standards Act, 86 Fed. Reg. 1168 (January 7, 2021). For more information, see https://www.federalregister.gov/d/2020-29274.