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Employee or independent contractor? Department of Labor issues new proposed “Five-Factor Test”

By Phoebe B. Mitchell

In the past several years, employers have struggled to determine whether some workers should be classified as employees or as independent contractors. The difference is significant, as employees are entitled to many benefits that independent contractors are not, including overtime for those not exempt under the federal Fair Labor Standards Act (FLSA). As a result, worker misclassification is a costly mistake employers want to avoid.

DOL proposal contracting

U.S. Department of Labor proposes new rules on who is considered an employee and who is considered an independent contractor.

This week, the United States Department of Labor (DOL) issued its anticipated proposed rule regarding classification of workers as independent contractors. According to Secretary of Labor Eugene Scalia, the proposed rule will “make it easier to identify employees covered by the [FLSA], while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.” DOL is accepting comments on the proposed rule for 30 days.

The new rule includes a five-factor test that considers the “economic reality” of the relationship between workers and their employers.

Among the five factors, the DOL made clear that two “core” factors are key:

  1. Control a worker has over their work
  2. The worker’s potential for profit or loss

Both factors help determine if a worker is economically dependent on someone else’s business, or alternatively, if the worker is in business for him or herself.

The nature and degree of the individual’s control over the work

This first core factor examines a worker’s ability to personally control his or her work. For example, a worker is an independent contractor if the worker, as opposed to the company, exercises substantial control over key aspects of performance of work.  A worker exercises substantial control over performance of work by setting his or her own schedule or selecting his or her own projects. Further, the worker exercises substantial control over key aspects of performance of work if the worker has the ability to do work for other employers, including the employer’s competitors.

On the other hand, a worker is properly classified as an employee if the employer, as opposed to the worker, exercises substantial control over key aspects of the performance of the work. For example, if the employer controls the worker’s schedule or workload, or directly or indirectly requires the worker to work exclusively for the employer, the worker should be classified as an employee.

The individual’s opportunity for profit or loss

This second core factor examines a worker’s personal opportunity for profit or loss. If the worker’s profit or loss opportunity is closely tethered to the work he or she performs, the worker is likely an independent contractor. In other words, a worker is a true independent contractor if the individual has the opportunity to earn profits or incur losses based on his or her own exercise of initiative, or management of his or her investment in helpers, equipment, or material to further the work.

Alternatively, an employee does not have as much personal opportunity for profit or loss. A worker who is unable to affect his or her earnings or is only able to do so by working more hours or more efficiently is properly classified as an employee.

Three other factors

The proposed rule includes three other factors:

  1. The amount of skill required for the work
  2. The degree of permanence of the working relationship between the worker and the potential employer
  3. Whether the work is part of an integrated unit of production.

For example, if a worker has specialized training that the employer does not provide, and the work relationship is by design definite in duration, the worker should be classified as an independent contractor. On the other hand, an employee depends on the employer to equip him or her with the skills or training necessary to perform the job, the work relationship is, by design, indefinite in duration or continuous, and the worker’s work is a component of the employer’s integrated production process for a good or a service. Lastly, the actual practice of an employer is more relevant than what may be contractually or theoretically possible in determining a worker’s classification as either an independent contractor or employee.

While these three factors are important, according to DOL, if the two “core” factors point to the same finding, “their combined weight is substantially likely to outweigh the combined weight of the other factors that may point toward the opposite classification.”

The complete proposed rule is available at: https://www.dol.gov/sites/dolgov/files/WHD/flsa/IC_NPRM_092220.pdf.

Phillips Murrah’s labor and employment attorneys continue to monitor developments to provide up-to-date advice to our clients regarding the DOL’s new rules.


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For more information on this alert and its impact on your business, please call 405.606.4711 or email me.

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