DOL Proposes New Rule Clarifying Independent Contractor Status

The U.S. Department of Labor ("DOL") has proposed a new rule interpreting independent contractor status under the Fair Labor Standards Act ("FLSA"). The purpose of the proposed rule is to provide clarity as to when a worker is an independent contractor, and not an employee, under the FLSA. If adopted, the proposed rule would operate as DOL's sole interpretation of independent contractor status. Note that, as discussed below, DOL's proposed rule does not affect Virginia's new law on independent contractor status.

Currently, when determining whether an individual is an employee or independent contractor for purposes of FLSA, courts utilize the economic reality test.  Under the economic reality test, the key inquiry is whether "as a matter of economic reality" the workers are "dependent upon the business to which they render service." Usery v. Pilgrim Equip. Co., 527 F.2d 1308, 1311 (5th Cir. 1976). Courts use a set of non-exhaustive factors to guide this inquiry, including: (1) the degree of the alleged employer's right to control the manner in which the work is to be performed; (2) the alleged employee's opportunity for profit or loss depending on his managerial skill; (3) the alleged employee's investment in equipment or materials required for his task, or his employment of helpers; (4) whether the service rendered requires a special skill; (5) the degree of permanency of the working relationship; and (6) whether the service rendered is an integral part of the alleged employer's business. Real v. Driscoll Strawberry Assocs., Inc., 603 F.2d 748, 754 (9th Cir. 1979). Although courts frequently use these factors, confusion regarding application and interpretation persist.

Due to the varied application and interpretation of the FLSA's economic reality test, DOL's proposed rule seeks to clarify and provide a more consistent standard for evaluating whether a worker is an employee or independent contractor under the FLSA. Specific issues DOL addresses in the proposed rule include clarifying that "economic dependence" turns on whether a worker is in business for him- or herself (i.e., the worker is an independent contractor) or is economically dependent on a potential employer for work (i.e., the worker is an employee). The proposed rule also provides guidance on other factors, including the nature and degree of the worker's control over the work and the worker's opportunity for profit or loss. As has always been the case, the parties' actual practice is more relevant to the analysis than what may be described in any written contract.

DOL is accepting comments on the proposed rule until October 26, 2020. The link to comment can be found here.

DOL's proposed rule on independent contractor status under the FLSA does not affect the new Virginia law on independent contractors that went into effect on July 1, 2020. The new Virginia law creates a legal presumption that anyone performing services for pay is an employee; the business has the burden to rebut that presumption by proving that the worker was properly classified as an independent contractor pursuant to the Internal Revenue Service's guidance. Thus, for purposes of Virginia's laws—including state taxation laws and state wage payment laws—the DOL's proposed rule will have little effect. But for purposes of the FLSA, DOL's proposed rule, if adopted, will apply.

Businesses need to proceed cautiously in classifying a worker as an independent contractor. The labor and employment attorneys at Vandeventer Black can assist in this analysis.