When are “Independent Contractors” Really “Employees”? The DOL Unveils Proposed New Test

The U.S. Department of Labor (“DOL”), the agency tasked with enforcing the Fair Labor Standards Act, has long applied a six-factor “economic reality” test to distinguish between employees and independent contractors. Today, the DOL unveiled proposed regulations intended to clarify and streamline the existing test into a new 5-factor “economic realities” test. 

Under the new 5-factor test, the first two factors – the employer’s control over the work, and the workers’ opportunity for profit and loss – are to be given the most weight. The other factors the DOL will consider are (1) the amount of skill required for the work, (2) the permanence of the working relationship, and (3) the degree in which the work is part of an integrated unit of production. 

If the DOL finalizes these proposed regulations, it may be easier for employers to appropriately classify their workers, and to defend independent contractor classifications. Generally, independent contractors are not entitled to federal employee protections, including overtime pay, sick leave, or other employee benefits. Thus, if an employer misclassifies an employee as an independent contractor, the employer could face significant damages in unpaid wages and back taxes. 

What Can I Do to Protect My Business?: 

• Recognize that the proposed rule is not yet final.  The public has limited time to comment on the proposed rules, after which a final rule will be published. 
• Remember that the DOL is only one source of law on who is an independent contractor.  Different tests are used by the state departments of labor and the IRS, for instance.  The tests adopted through common law are also used to determine employment status in certain contexts.  
• Consider examining existing independent contractor relationships now in light of the new proposed rule.  While the proposed rule is not yet law, assessing your independent contractors’ relationship against it will make it easier to make changes to your practices if necessary.  Using knowledgeable employment counsel for this kind of review will help keep the review privileged and can help you identify potential pitfalls in your current employment/contracting practices.