Articles & Blogs

Department of Labor Again Attempts to Clarify "Who is An Independent Contractor"

November 17, 2021
October 27, 2020

The Department of Labor (DOL) is once again attempting to clarify the seemingly age-old question of what constitutes an independent contractor. Employers have had to consistently deal with the decision of how to classify workers: as employees or independent contractors. This problem has affected many employers; most specifically employers that deal with “gig-economy” workers.

Independent Contractor or Employee?

The DOL’s proposed rule implements an “economic reality” test. The test contemplates whether a worker is economically dependent on another employer for work (an employee) or is in business for themselves (an independent contractor).

In making the determination of whether the worker is an independent contractor or an employee, the rule first identifies 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 based on initiative and/or investment. The factors are in place to help decide whether the workers are in business for themselves or economically dependent on someone else’s business.

Some examples of a worker’s control of the work product include whether the worker uses tools provided by the employer, whether the worker sets his or her own schedule, whether the employer tells the worker where to work and what to do when they commence work, whether the worker is supervised, and whether the worker is able to work with other individuals or entities.

If a worker directs the control over the work and has the ability to profit or experience losses based on the work performed, he or she will likely be considered an independent contractor under the new rule.

In addition to the “core factors,” the DOL also lists three “guideposts,” which include:

(1) the amount of skill required for the work;

(2) the degree of permanency of the working relationship between the worker and the potential employer; and

(3) whether the work is part of an integrated unit of production.

The more skill required by each worker for a specific job increases the likelihood that the worker will be classified as an independent contractor. However, the more permanent the working relationship is between the worker and the other entity involved would weigh in favor of a finding that the worker is an employee. If the relationship between the worker and entity involved is more defined in its duration, this find would also weigh in favor of finding that the worker is an independent contractor. Finally, the integrated unit of production factor looks to whether the worker essentially works closely or in unison with actual employees, performing identical or similar tasks.

The DOL advised that it is seeking comments for the proposed rule for 30 days. Once the DOL reviews the comments, it will then publish a final rule.

How does the DOL’s proposed rule differ from the current independent contractor analysis?

As many employers know, the DOL previously analyzed the determination through five or six different factors, without assigning specific weight to each factor. However, under the new proposed rule, the most weight is clearly being placed on the “core factors” and the DOL has explained that their combined weight is substantially likely to outweigh the other three factors. As such, the new rule provides some clarity to the analysis, and the determination of whether a worker is an independent contractor will essentially be guided by the control of the work performed and the profit or losses of the work performed.

Based on the proposed rule, employers are advised to reevaluate their current workforce to determine whether these individuals will be defined as independent contractors or employees. Based on the everchanging rules and regulations regarding independent contractor status, it is recommended that all employers consult with experienced attorneys to ensure they are properly classifying their workers.