HR Policy Weighs in on Labor Department’s Proposed Independent Contractor Rule

October 30, 2020

As California and other states continue to narrow the definition of independent worker status, the Association called for legal clarity in worker classification cases in comments filed with the U.S. Department of Labor.

The DOL’s Proposed Rule would clarify independent worker status under the FLSA in stark contrast to state-level classification standards such as California’s ABC test, which significantly restricts the independent contractor status.

The Proposed Rule specifically clarifies and codifies the “economic realities” test, under which the DOL would consider whether a worker is economically dependent on an entity for work, and is therefore an employee.  Making this determination would be based on two core factors: (1) the nature and degree of the worker’s control over the work, and (2) the worker’s opportunity for profit or loss.  Three additional factors would serve as additional, secondary considerations, including the amount of skill required for the work, the permanence of the working relationship, and whether the worker is part of an integrated unit of production.  

The Association welcomed the DOL’s rulemaking as benefiting both employers and workers. The Association’s comments emphasized the inconsistent and conflicting interpretations of independent contractor worker status under the FLSA among the courts and regulatory authorities, and the negative consequences such legal ambiguity has for both employers and workers.  Employers have become increasingly subjected to costly misclassification litigation – and in particular class action litigation – as a result. 

Degree of control most important:  The Association’s comments asserted that the degree of control actually exercised by either the potential employer or worker is the key determinator of employee or independent contractor worker status.  The Proposed Rule’s test for independent contractor worker status included control as one of two key factors, among three other secondary factors.  The Association urged the DOL to adopt the control factor as the singular primary factor in its Final Rule.  

The comments highlight the valuable flexibility the independent contractor classification has for both employers and workers, including allowing workers the ability to set their own schedules and work for multiple employers.  Independent contractors are similarly essential for companies, particularly in industries where securing talent is increasingly competitive and many workers prefers short-term, flexible work arrangements without committing to a single employer. 

In 2017, the Association proposed a safe harbor for actions and policies that benefit independent contractors as well as a company’s own employees.  This would enable companies to provide benefits such as health care and defined contribution retirement plans, among others, to both their own employees and their contingent workforce, without the contingent workforce losing independent contractor worker status.  We again supported the idea in our comments, alongside Littler's Workplace Policy Institute. 

Outlook:  A Final Rule is expected to be published by the end of 2020.  However, if Vice President Biden wins the presidency, the rule is likely to be reversed and possibly replaced with a regulation embracing the ABC test.  It is also vulnerable to congressional nullification by a Democrat-held Congress under the Congressional Review Act.