Employee or independent contractor?

The U.S. Department of Labor has proposed a rule to clarify whether a worker is an employee or an independent contractor under the Fair Labor Standards Act.

The proposal – which could make it easier for a worker to qualify as an independent contractor – published in the Federal Register in late September, and comments were accepted until Oct. 26. A final rule could follow in coming months.

Worker classification has been a hot topic recently, affecting everything from the trucking industry to Uber drivers and freelance writers.

“The department’s proposal aims to bring clarity and consistency to the determination of who’s an independent contractor under the Fair Labor Standards Act,” Labor Secretary Eugene Scalia said in a news release. “Once finalized, it will make it easier to identify employees covered by the Act, while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.”

According to the Department of Labor, the proposal would:

• Adopt an “economic reality” test to determine a worker’s status as an FLSA employee or an independent contractor. The test considers whether a worker is in business for himself or herself or is economically dependent on a putative employer for work.
• Identify and explain two “core factors,” specifically the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on initiative and/or investment. These factors help determine if a worker is economically dependent on someone else’s business or is in business for himself or herself.
• Identify three other factors that may serve as additional guideposts in the analysis: the amount of skill required for the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work is part of an integrated unit of production.
• Advise that the actual practice is more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.

“The department believes that streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility,” said Cheryl Stanton, administrator for the Wage and Hour division.

California’s AB5

While the Department of Labor proposal isn’t expected to affect the California law, it likely helped motivate the desire to provide federal clarification.

Signed into law in 2019, AB5 codifies a 2018 California Supreme Court decision that established the ABC test to determine a worker’s status.

Under the ABC test, all workers are considered employees unless the hiring business demonstrates that three factors are established:

• A. That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact.
• B. That the worker performs work that is outside the usual course of the hiring entity’s business.
• C. That the worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

The controversial law affects a variety of industries, including trucking. Opponents say the B prong of the test makes it impossible to hire independent contractors.

Shortly after the law went into effect in January, the California Trucking Association was granted a preliminary injunction that blocked California from enforcing it against motor carriers. In March, the U.S. Court of Appeals for the Ninth Circuit denied a motion to halt the preliminary injunction. On Sept. 1, the U.S. Court of Appeals for the Ninth Circuit heard oral arguments in the case to decide whether the injunction should remain in effect. As of press time, the court had not made a decision. LL