The Practical Implications of the DOL’s Proposed Independent Contractor Test
Employee or independent contractor? The determination has consequences for various “stakeholders.” Unions legally may organize employees, but not independent contractors. Companies must withhold taxes from employee pay; not so with independent contractors, who are responsible for making these payments on their own. The government as a “stakeholder” experiences less “tax leakage” where the relationship is employment. Individuals who wish to have maximum flexibility as to when, where and how they work, such as some people with disabilities or with caregiving responsibilities, may benefit from not having to adhere to the work rules that come with employment status. Employers have a stake too. Get it wrong and they are on the hook for unpaid wages, taxes, liquidated damages and attorneys’ fees.
But, what does it mean to be an independent contractor? Or to be misclassified as one? Like the National Labor Relations Board, which has revisited the determination repeatedly over the years and is in the process of reconsidering its test, the U.S. Department of Labor’s interpretation has changed from one Presidential administration to the next. And on it goes with the DOL’s newest proposed guidance that the very wage-and-hour-savvy Eric Hemmendinger wrote of on October 11, 2022 in an e-lert/blog post.
The DOL proposed rule is, according to the Department, intended to return the inquiry to a “totality of the circumstances” analysis that is generally used by courts in cases examining the issue. The DOL “believes that this approach is the option that would be most beneficial for stakeholders.” The DOL states that the focus of this inquiry, and the multiple factors to be considered, ultimately is whether the individual is ‘economically dependent’ on the employer looking at the situation as a whole, or truly ‘in business for themselves.’”
So, let’s take a deep dive into the factors that the DOL is proposing, and what they examine:
- Opportunity for profit or loss based on managerial skill. The DOL says the opportunity to make more money by working more hours or taking more jobs normally is not the sort of opportunity for profit reflective of managerial skill. Instead, the DOL suggests the following as possibly relevant: “whether the worker determines or can meaningfully negotiate the charge or pay for the work provided; whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space.”
- Investments by the worker and the employer. The DOL states that the worker investing in equipment to do the work is not a driving force. Instead, the question is whether the overall investments by the worker are made to support their own independent business and serve a business-like function, such as to take on different types or more work, extend market reach or reduce costs. The DOL suggests that another consideration is the worker’s investments overall in their business relative to the overall investments by the “employer” (a term used by the DOL throughout the proposed rule; is the DOL telegraphing some bias here?). According to the proposed rule, “The worker’s investments need not be equal to the employer’s investments, but the worker’s investments should support an independent business or serve a business like function for this factor to support independent contractor status.”
- Degree of Permanence of the Working Relationship. The DOL offers that relationships that are indefinite or ongoing, often involving exclusive relationships, weigh in favor of employee, not independent contractor status. By contrast, relationships that are definite in nature, project based, sporadic, or nonexclusive, look more like independent ones (except where the sporadic nature of work is based on the nature of the business where the work is performed). The DOL concedes that regularly occurring, fixed periods of work may be carried out by independent contractors but adds that this would not be the case if it is due to the seasonal or temporary nature of the work itself.
- Nature and Degree of Control. The DOL describes this factor again using “employer” to describe the company that is using the worker’s services, and whether said employer exerts control, including reserved control, over the performance and economic aspects of the working relationship. Setting the schedule of work, supervising work (including technological supervision by means of a device or electronically) and demanding exclusivity by the worker in servicing the employer are indicia of control. Reserving the right to discipline the worker or make supervisory visits to a worker may exert control by virtue of the possibility of these outcomes, even when not actually exerted. So too is placing demands on the worker’s time that do not allow them to work for others when they choose (even where a contract with the worker allows them to do so). Control over the price for the work and marketing of the worker’s service also is relevant. If controlled by the worker, the factor favors independent status but not if by the employer. However, the DOL concedes that imposing standards based on legal obligations, health and safety requirements, or customer or contractual service standards is not control that undermines independent contractor status.
- Extent to which the work performed is an integral part of the “employer’s” business. Workers who perform a function that is integral to the business (i.e. critical, necessary or central to the employer’s principal business) are more likely to be employees. Those who do not perform such functions are more likely independent.
- Skill and Initiative. The DOL states that this factor focuses on whether the worker uses specialized skill to perform the work, and whether that skill contributes to business-like initiative. By contrast, workers who do not use specialized skills or rely on the employer for training, are engaged in work that looks more like employment. As to what is business-like initiative and what is not, the DOL offers the following examples:
A highly skilled welder provides welding services for a construction firm. The welder does not make any independent judgments at the job site beyond the decisions necessary to do the work assigned. The welder does not determine the sequence of work, order additional materials, think about bidding the next job, or use those skills to obtain additional jobs, and is told what work to perform and where to do it. In this scenario, the welder, although highly skilled technically, is not using those skills in a manner that evidences business-like initiative. The skill and initiative factor indicates employee status.
A highly skilled welder provides a specialty welding service, such as custom aluminum welding, for a variety of area construction companies. The welder uses these skills for marketing purposes, to generate new business, and to obtain work from multiple companies. The welder is not only technically skilled, but also uses and markets those skills in a manner that evidences business-like initiative. The skill and initiative factor indicates independent contractor status.
The rules proposed by the DOL, which determine how the agency will interpret the statute in enforcing the law and are offered as guidance to courts in cases and people in real world working relationships, are open to interpretation. According to the DOL, they are intended to align with the underlying “expansive” definition of “employee” under the FLSA itself.
The public may comment on the proposed rule, and the DOL has extended its original deadline for the submission of such comments from November 28 to December 13, 2022. Comments may be submitted here. Once the comment period closes, the DOL will consider the comments and may make changes; however, we believe these rules are likely to be adopted in final form without meaningful modification. Employers should prepare for increased scrutiny of any independent contractor relationship and more enforcement actions by the DOL.