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DOL Issues Independent Contractor Clarification

Tuesday, January 19, 2021

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The U.S. Department of Labor has announced a final rule meant to clarify the status of independent contractors under the Fair Labor Standards Act.

“This rule brings long-needed clarity for American workers and employers,” said U.S. Secretary of Labor Eugene Scalia. “Sharpening the test to determine who is an independent contractor under the Fair Labor Standards Act makes it easier to identify employees covered by the Act, while recognizing and respecting the entrepreneurial spirit of workers who choose to pursue the freedom associated with being an independent contractor.”

The Rule

The DOL’s Final Rule includes the following clarifications:

  • Reaffirms an “economic reality” test to determine whether an individual is in business for themselves (independent contractor) or is economically dependent on a potential employer for work (FLSA employee). 
  • Identifies and explains two “core factors” that are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for themselves:
    • The nature and degree of control over the work.
    • The worker’s opportunity for profit or loss based on initiative and/or investment.
  • Identifies three other factors that may serve as additional guideposts in the analysis, particularly when the two core factors do not point to the same classification. The factors are:
    • The amount of skill required for the work.
    • The degree of permanence of the working relationship between the worker and the potential employer.
    • Whether the work is part of an integrated unit of production.
  • The actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
  • Provides six fact-specific examples applying the factors.
Ed Brown, public domain, via Wikimedia Commons

The U.S. Department of Labor has announced a final rule meant to clarify the status of independent contractors under the Fair Labor Standards Act.

“Streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility,” said Wage and Hour Division Administrator Cheryl Stanton.

“The rule we announced today continues our work to simplify the compliance landscape for businesses and to improve conditions for workers. The real-life examples included in the rule provide even greater clarity for the workforce.”

The rule takes effect on March 8.

Misclassification Debate

The ruling was set into motion after a slew of misclassification issues in the past few years. In fact, in September of 2019, the National Labor Relations Board has determined that the misclassification of employees as independent contractors does not violate the National Labor Relations Act.

Enacted in 1935, the NLRA was created for the purpose of protecting employer and employee rights, including workers’ rights to organize and engage in collective bargaining. Additionally, the United States government also uses the act to prevent private employers from conducting harmful labor and management practices to its workers.

According to an NLRB news report, the board requested a briefing on the issue regarding a case involving Velox Express, Inc. in February 2018, where Velox was accused of being in violation of labor laws within the transportation industry.

Applying a decision made from a previous case—SuperShuttle DFW, Inc., 367 NLRB No. 75 (2019)—which found that workers were employees and not independent contractors, and ultimately protected by the NLRA, it determined that the misclassification of employees as independent contractors did not violate the act itself.

The decision was received after reviewing briefs filed by the general counsel, respondent, charging party and 13 additional briefs received from 28 others.

However, stated in the agency’s report, “Based on that determination, it held that the employer violated the NLRA when it discharged one of these employees for bringing to management’s attention group complaints about the way the employer was treating its workers. The board majority held, however, that the employer’s misclassification of its employees as independent contractors was not a separate violation.”

In California

Around the time of this decision, California Gov. Gavin Newsom signed into law Assembly Bill 5, which aims to reduce instances of worker misclassification as independent contractors.

AB 5 adds a section to the state’s Labor Code, pulling from a 2018 decision in the Superior Court of Los Angeles, which relied on a test commonly known as the “ABC test” to establish whether or not a worker is an independent contractor.

The bill had been amended some months after its introduction after a report was released from the University of California Berkeley Labor Center, which found that construction workers were one of three occupations—along with truck drivers and janitorial workers—in the state routinely misclassified as independent contractors.

Berkeley used a 2000 study by the U.S. Department of Labor and a 2011 report by the Economic Roundtable. According to those studies, the construction industry has the highest rate of misclassification nationally and that misclassification most commonly occurs in the “specialty trades and hands-on construction occupations, especially among workers whose occupation is carpet installer, laborer, painter, or construction helper.”

The legislation pulls from the Dynamex Operations West Inc. v. Superior Court of Los Angeles case, which implemented the ABC test, which says that someone is an employee if a company controls what they do, if their work is linked to a company’s primary business and if they do not have an independent business performing that work.

AB 5 codifies that test, with some exceptions, though many groups are pushing for more.

One such exception was made for the construction industry. For instance, subcontractors with a state license are exempt from the “B” portion of the ABC test, which requires that independent contractors offer services that are outside of the hiring contractor’s normal scope of work. Technically, general contractors could do the work they’re outsourcing, but this exemption preserves the contractor-subcontractor relationship.

   

Tagged categories: Business matters; Contractors; Department of Labor; Good Technical Practice; Government; NA; North America; Regulations; Subcontractors; Taxes

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