By Attorney Kelly Jesson
On September 22, 2020, the U.S. Department of Labor (“DOL”) issued a proposed rule regarding classifying workers as employees versus independent contractors. As we’ve written before, failing to correctly classify workers may result in employers paying thousands of dollars in fines, taxes, and back wages. The Fair Labor Standards Act (“FLSA”) requires that employers pay their employees minimum wage and overtime, but these rules do not apply to independent contractors.
The DOL has proposed this rule because of conflicting court cases across the country, in order to create the “sole and authoritative interpretation of independent contractor status under the FLSA.” The proposed rule creates an “economic realities test” to determine whether a worker is an employee or an independent contractor. If the worker is economically dependent on the employer for work, he/she should be classified as an employee. If a worker is considered to be in business for him or herself, that worker should be classified as an independent contractor. In the past, several factors have been used to aid in court’s determinations as to whether or not a worker is economically dependent on the employer, but with this proposed rule, the DOL specifically notes that there are two core factors that are to be given more weight than others:
1. The nature and degree of the worker’s control over the work: If the worker, and not the employer, exercises substantial control over key aspects of the work, such as by setting his or her own work schedule, working with little or no supervision, and being able to work for others, including a potential employer’s competitors, they may be classified as an independent contractor.
2. The worker’s opportunity for profit or loss: If the worker has an opportunity to earn profits or incur losses based on his or her personal initiative, managerial skills, or business acumen (including investments in money and also equipment, tools, and people), the worker may be classified as an independent contractor.
The text of the proposed rule references “entrepreneurs” multiple times. In reviewing the proposed rule, it is clear that the DOL considers independent contractors to be workers who work for themselves. “[T]he ability to control one’s work and to earn profits and risk losses strikes at the core of what it means to be an entrepreneurial independent contractor, as opposed to a ‘wage earner’ employee.”
The proposed rule has been submitted for public comments and, given that an election is happening in a month, it is unlikely that the proposed rule will become law in the next few months. But we will be keeping an eye on it.
If you’re considering hiring your first worker, or have questions about your existing workers, please give Jesson & Rains a call!
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