The U.S. Department of Labor recently released its proposed rule that updates its definition of an independent contractor (IC) under the Fair Labor Standards Act.
First: It is a proposed rule, not a final rule.
DOL sticks with the Economic Realities test, not the ABC test
The DOL is not adopting an entirely new definition of what it means to be an IC. It is also not adopting the ABC test or any other new test. The DOL has long used the Economic Realities test which weighs multiple aspects of the relationship between the contracting company and the IC to determine if the IC is an independent business making significant decisions that lead to the IC’s profit or loss.
This proposed rule would act as the DOL’s new interpretation of the Economic Realities test, using it to form their investigations and rulings on misclassification claims and eliminating the current version used by the Trump administration.
The problem is the DOL’s proposed interpretation of the Economic Realities test favors employee status more than prior versions.
Key factors of the DOL independent contractor rule
Under this rule, the DOL will consider six factors when determining if a worker is an independent contractor:
- Opportunity for profit or loss based on the IC’s managerial skill. The DOL expects ICs to make meaningful and intellectual decisions that impact profitability or losses. While taking more deliveries is not considered evidence of managerial skill, ICs making decisions about hiring and firing helpers, advertising services, managing costs, or adding vehicles and customers is.
- IC vs contracting company investments. The DOL wants to see the IC made material and substantial investments in their business.
- Permanence of the relationship. The DOL wants to see the relationship has a clear beginning and ending and does not continue uninterrupted for years on end.
- Freedom from contracting company control. The DOL wants to see the IC can and does serve multiple customers and has decision-making authority over costs, rates to charge, and so on. Notably on this factor, (1) the DOL is proposing that control required by law or customer requirements may still be considered the contracting company’s control over the IC, and (2) if the IC is performing work that is integral to the contracting company’s business, that will be considered evidence of employee status. These present the most significant departure from the DOL’s existing interpretation of the Economic Realities test.
- Skill and initiative of the IC. The DOL wants to see the IC has specialized skills and exercises the initiative to build a business around those skills. While the DOL does not consider driving to be a specialized skill, it does consider a driver finding profitable deliveries, expanding operating areas, or adding vehicles, helpers, or contracting company clients to be skilled and exercising initiative.
- Additional factors. New under this proposed rule is considering “all other factors” in the relationship between the IC and the contracting company that might suggest the worker was in an independent business.
When the DOL makes determinations about independent contractor status, they view these factors as a balancing test. Not every factor must be met, and no single factor outweighs them all.
Timeline and governance
Over the next 45 days, the public will comment on the proposed rule, offering arguments for and against the rule or recommended changes. The DOL will then review the comments and decide if it wants to publish the rule with or without changes or scrap it and start over. A decision can be made any time after the 45-day period and is often made within a few weeks or months.
If finalized, the rule will only apply to claims overseen by the U.S. DOL. It has no impact on IRS issues or workers’ compensation, unemployment, or many state claims. It applies mostly to claims brought by independent contractors or the DOL itself alleging the independent contractor was improperly classified and not paid minimum wage, not paid overtime, or forced to pay business expenses without reimbursement under federal law.
Rules vs. laws
This is a rule, not a law, and not a court decision. Rules are published by agencies like the DOL whereas laws are passed by legislatures or courts. While rules must not conflict with laws, they are often given leeway since courts consider agencies to be experts in their fields.
Reminders for contracting companies
This proposed rule proves what we already knew to be true: the DOL strongly favors finding a worker is an employee vs. an IC, making adhering to compliance with IC status rules more critical now than ever.
Three points to always remember are:
- The IC is and should be treated as, a small business owner. In many of our examples, the IC is a small business owner that provides vehicle and driving services, not a driver.
- To be financially successful the IC must figure out ways to grow revenue (e.g. finding profitable deliveries or adding contracting company clients) and reduce costs (e.g. eliminating idle time or reducing vehicle maintenance costs).
- Treating ICs well helps prevent claims. As a contracting company, are you providing an environment and opportunities where ICs can thrive? Are you responding to IC questions and concerns quickly, professionally, and thoroughly to address small issues before they become big issues? Are you using a company that pays ICs accurately and on time? Are you using a company that can provide ICs with opportunities for profit and loss?
For over 20 years, Openforce has actively helped industry trade associations push back against laws and court decisions that have negatively impacted IC status. This will be no different as we are already working with multiple state and national trade associations to lend our expertise and support in their efforts to push back on misguided rules like this.
Contact us today to learn how Openforce can help your business ensure compliance under the new DOL independent contractor rule.