On September 22, 2020, the federal Department of Labor (DOL) released a Notice of Proposed Rulemaking regarding rules for employers to follow when classifying a worker as an independent contractor or an employee under the Fair Labor Standards Act (FLSA).  This analysis is especially important to employers as the gig economy grows throughout the United States and companies such as Uber, Lyft, and DoorDash rely heavily on gig workers. The Notice of Proposed Rulemaking can be interpreted as a loosening of the standards, so that employers will more easily be able to classify workers as independent contractors once the rule is finalized.

Whether a worker is an employee or an independent contractor is critical when it comes to important issues such as pension eligibility, workers' compensation coverage, wage and hour law, and many other matters. Employers do not pay employment taxes for independent contractors and do not withhold federal, state, and local taxes from payments made to independent contractors. Also, independent contractors are not included in an employer's benefits programs, and they are not eligible for unemployment insurance benefits. Independent contractors are exempt from wage and hour and employment discrimination laws. Employers are not required to pay minimum wage and overtime to independent contractors.

Employers frequently retain the services of independent contractors to assist them during peak business periods, to work on special assignments, and to perform services that are not part of the employer's regular business. An independent contractor is a worker who individually contracts with an employer to provide specialized or requested services on a project or as-needed basis. The important distinction, from the point of view of an employer, is that an independent contractor is an individual who is performing services for the employer but who is not an employee. Problems can arise, however, when individuals who are truly employees are treated by employers as independent contractors.

The DOL’s proposed rule establishes an “economic reality” test to analyze whether a given worker should be classified as an independent contractor or an employee. The DOL states, “The test considers whether a worker is in business for themselves (independent contractor) or is economically dependent on a putative employer for work (employee).”

The proposed rule provides an analysis of the two main factors that would be used in determining a worker’s classification. The first factor would be “the nature and degree of the worker’s control over the work.” The second factor would be “the worker’s opportunity for profit or loss based on initiative and/or investment.”

In addition to the two main factors listed above, the DOL also outlines three more factors to guide employers in their classification process: “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….”

Lastly, the DOL announced that the proposed rule makes it clear that employers should focus on “actual practice” rather than “what may be contractually or theoretically possible” when conducting a classification analysis on a worker. “Actual practice” should be given more weight in the evaluation.

Based on the guidelines outlined in the proposed rule, the new rule would make it easier for employers to classify workers as independent contractors when compared with the prior Obama era rule.

Once the Notice of Proposed Rulemaking is published in the Federal Register, the DOL will seek public comments on the proposed rule for 30 days. This will provide the general public and businesses of all types the opportunity to provide feedback on the proposed rule. The DOL will then consider the suggestions, criticism and feedback received, and make final revisions to the rule before it is released.

The economic and tax advantages associated with the independent contractor relationship are significant. Therefore, the temptation to pursue and establish such agreements instead of permanent employment arrangements is a practical reality. In order to minimize intentional or inadvertent abuse that can result in substantial penalties, employers should follow developed guidelines to assist the employer in correctly identifying and classifying employment relationships.