While states like California continue to make it tougher for companies to properly classify workers as independent contractors by adopting the ABC test, on September 25, 2020, the U.S. Department of Labor issued a notice of proposed rulemaking seeking to simplify and clarify how to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (“FLSA”) economic realities test. The FLSA is the federal law regarding wage and hour requirements. The FLSA does not clearly define “employee” or “independent contractor”. As a result, courts created a test known as the economic reality test that relies on balancing of seven factors. This has resulted in inconsistent rulings and uncertainty amongst companies and individuals.
As a result, the DOL has proposed a new rule that, according to the Secretary of Labor Eugene Scalia, “aims to simplify, clarify and harmonize” existing case law applying the economic realities test while still preserving the rights of workers to choose flexibility, freedom and entrepreneurial benefits that come with being an independent contractor.
The proposed new rule would replace the seven factors with two core factors that would consider (1) the nature and degree of the worker’s control over the work and (2) the worker’s opportunity for profit or loss. Only if the analysis of these core factors is not determinative or points in different directions, then three additional factors are considered. The DOL has fast-tracked this proposed rule and appears committed to finalizing it before the end of the year. As a result, changes may be in effect soon.