The U.S. Department of Labor (DOL) is proposing a new regulation it says will simplify the determination of when a worker is an independent contractor instead of an employee. The rule, which is being fast-tracked with a shorter comment and adoption period, appears to make it easier for employers to classify workers as independent contractors rather than employees covered by federal minimum wage and overtime laws. The move expands the DOL’s efforts to loosen restrictions on independent workers.

Proposal Focuses on ‘Economic Realities’

Currently, the employee-vs.-independent-contractor analysis is based on the assessment of multiple factors, with none being deemed dispositive or entitled to greater weight. The proposed rule focuses on the “economic realities” and culls down the test to five essential questions, with the following two being given the greatest weight:

• Nature and degree of the employer’s control over the work; and
• Worker’s opportunity for profit or loss based on personal initiative or investment.

The other three factors, deemed “guideposts” to aid in the analysis, will typically be applied when the two primary factors conflict. The guideposts are:

• Amount of skill required for the work;
• Degree of permanence in the work relationship; and
• Whether the work is part of an integrated unit of production.

‘Some Prefer to Be Independent’

The DOL has stated that the new rule is intended to bring clarity and consistency to the determination of contractor status. Secretary of Labor Eugene Scalia explained the current regulations create a bias toward workers being classified as employees, and he is seeking a more balanced approach that recognizes the “powerful reasons why some workers prefer to be independent, rather than accountable to a company as its employee.” He says the new rule will respect the decision many people make “to pursue the freedom and entrepreneurialism associated with being an independent contractor.”

It’s important to recall that regulations represent only how the administrative agencies interpret legislation, and courts remain free to interpret the same laws consistent with their own analysis and prior precedential case law. Nevertheless, the agency determinations are often accorded significant weight in the courts and therefore are very instructive in determining how the laws will apply to any particular case.

The proposal offers only a 30-day public comment period in the hope of moving the process quickly and installing the new regulation before the presidential election.

Takeaway for Employers

The new regulation, if enacted, will certainly bring greater certainty to the determination of contractor status and should help reduce the number of lawsuits based on misclassification. We’ll watch for further developments.

Dennis J. Merley is an attorney with Felhaber Larson in Minneapolis, Minnesota. You can reach him at dmerley@felhaber.com.