The independent contractor/employee classification conundrum is nothing new. Courts, state legislatures, and even the IRS have developed a slew of multi-factor tests to assess whether a worker is an employee or independent contractor. Mixed among these tests is arguably the most significant-the U.S. Department of Labor’s six-factor test, which is now being given a much-needed makeover. On September 22, 2020, the DOL released a Notice of Proposed Rulemaking, announcing an employer-friendly proposed rule that nixes a balancing test in favor of a test that focuses on the two factors that matter.
As the rule currently stands, the DOL has a six-factor test to assess the worker’s economic dependence on the business, including: (1) the business’s control over the workers; (2) the permanency of the relationship; (3)the workers’ investment in facilities and equipment; (4) the skill required to complete the work; (5) the opportunities for profit or loss; and (6) the extent to which the workers’ services are integrated into the business. No one factor is given more weight than any other.
While the proposed rule similarly addresses the “economic reality” of the employment relationship, there is now a five-factor test, which focuses on two core factors:
- the nature and degree of the worker’s control over the work; and
- the worker’s opportunity for profit or loss based on initiative or investment.
According to the DOL, these two factors are granted such great weight that, when they align and point to the same finding, “the bulk of the analysis is complete.” However, when they do not align, the following three factors are weighed:
- the amount of skill required for the work;
- the degree of permanence of the working relationship; and
- whether the work is part of an integrated unit of production.
This new test would assess whether a worker is truly in business for themselves, like a contractor, or whether they are economically dependent on their employer, as an employee. If adopted, it would make it easier for workers to be classified as independent contractors, as it no longer focuses on the control the business has over the work, but rather the worker’s control over his or her work and earnings based upon individual initiative or investment. It is certainly more business-friendly than some state laws, such as California’s Assembly Bill 5, which center on whether the workers perform work outside the usual business of the company. However, even if adopted, this test would only apply to worker classification under the FLSA and not individual states. Businesses should still conduct a separate analysis under state law.
In its efforts to finalize the rule before the end of 2020, the DOL will only be allowing a 30-day public comment period, much shorter than the usual 60-day period. It appears that a combination of lobbying from the business community and the potential results of 2020 presidential and Senate elections have led to the DOL’s fast-tracking to issue a final regulation before any potential change in presidential administrations.