Independent Contractor or Employee?

A worker who performs services for your company as an independent contractor is not an employee and therefore is not covered under the Fair Labor Standards Act (FLSA). However, the FLSA does not define “independent contractor.”

In October, the Wage and Hour Division (WHD) of the U.S. Department of Labor (DOL) published a Notice of Proposed Rulemaking in the Federal Register concerning the classification of employees and independent contractors under the FLSA. One of the main functions of the FLSA is to outline the minimum wage and overtime requirements that apply to employees but not independent contractors.

The proposed regulations would rescind and replace the independent contractor rule adopted in 2021, which provided for a “core factors” analysis. The proposed regulations apply a framework for determining whether a worker is an independent contractor under the FLSA. This framework rejects the approach of the 2021 regulations, which rejected the plain text of the FLSA and decades of caselaw, in favor of a “totality of the circumstances” approach that is more consistent with judicial precedent. Instead of focusing primarily on two “core” factors (nature and degree of worker’s control and the worker’s opportunity for profit or loss), the proposed regulations require the balanced consideration of six factors that reflect the economic reality of the working relationship, which include:

• The worker’s opportunity for profit or loss due to managerial skill;
• Investments by the worker and the company;
• The degree of permanence of the work relationship;
• The nature and degree of control over the work;
• Whether the work is an integral part of the employer’s business; and
• Skill and initiative.

Application of this framework also may require the consideration of other relevant factors. This framework is indicative of the basic tenet that individuals who are economically dependent on the employer for work are employees, and those who are in business for themselves are independent contractors.

The comment period for the proposed new regulations ended on December 13, 2022. Several senators have urged the DOL not to move forward with its proposed rule for determining independent contractor classification due to the impact on workers and businesses. At this time, the proposed regulations have not been formally adopted at this time.

So, as an employer, what should you take from these proposed rules? For now, it is very important for employers to remember that simply calling a worker an independent contractor or even having a contract is not enough. The worker actually has to meet the statutory or regulatory test for being an independent contractor. And the penalties for misclassifying a worker can be substantial

Contact AKC attorney Julie Ryan at [email protected] should you need assistance navigating state and federal regulations for the classification of independent contractors.