After a long-standing rule that left room for interpretation when classifying workers, the U.S. Department of Labor (DOL) issued a new proposed rule that significantly simplifies the classification of employees and independent contractors under the Fair Labor Standards Act (FLSA). DM Payroll Solutions explores the new proposed rule and shares insight on how it can affect the classification of your workers.

Core Factors of the Classification

Since the FLSA does not have a definition for “employee”, courts have historically filled in the gap with an “economic realities” test that takes several factors into account. By proposing the new rule, the DOL acknowledged that the test is not always easy to apply, as it can be ambiguous and out of touch with modern technology and work environments. As a result, the DOL proposed to simplify the contractor test by homing in on two core factors:

1. The nature and degree to which a worker controls their work
2. The worker’s profit or loss opportunity

If both factors lean toward a classification (employee or independent contractor), it is likely the correct call. Under this logic, if workers are free to determine the means by which they perform a job and can use their own judgment when determining aspects of a job to earn a profit, they are likely an independent contractor.

The DOL’s proposed test also takes into consideration:

• The worker’s skills or training required to complete a job (typically, skilled jobs are indicative of independent contractor status)
• The longevity of the business relationship (indefinite and long-term relationships signify employee status)
• If the work is integral to everyday operations or production (as opposed to a segregable task)

DOL’s Proposed Test vs. the Current Test

While these factors are similar to the current multifactor test, in addition to implementing the core factors, the DOL’s proposed test deviates from existing legislation in a few substantial ways. Notably, the proposed test focuses on actuals versus what is theoretically or contractually possible. Employers facing class action claims can benefit from this, as it is typically difficult to obtain class certification under tests examining actual control. The proposed test also clarifies that the following do not constitute control for worker classification purposes:

• Meeting safety standards
• Carrying insurance
• Adhering to quality standards or deadlines

The proposed test only applies to contractor status under the FLSA, not state law. If the DOL eventually adopts the proposed rule, employers would be required to conduct a separate analysis of contractor status to satisfy state rules. There is a 30-day comment period for the proposal once it has been published in the Federal Register, and it is expected that the DOL will announce a final regulation prior to any changes in presidential administration.

DM Payroll Solutions will continue to keep you updated on proposed and final employee classification regulations. We’re here to help make sure your payroll accurately reflects your workforce.