DOL Publishes Proposed Rule to Redefine "Worker" Under FSLA
The definition of independent contractor, as evidenced in the gig economy controversy, is not always clear cut.
In recent years, employers have increasingly contracted out or otherwise shed activities to be performed by other entities by using subcontractors, temporary agencies, labor brokers, franchising, licensing and third-party management.
In their efforts to reduce labor costs and avoid employment taxes, employers often classify workers as independent contractors. This is often done inappropriately. A misclassified employee — with independent contractor or other non-employee status — lacks minimum wage, overtime, workers' compensation, unemployment insurance, and other workplace protections. By not complying with the law, these employers have an unfair advantage over competitors who pay fair wages, taxes due, and ensure wage and other protections for their employees.
The Fair Labor Standards Act governs federal wage/hour standards and provides a minimal level of protection for employees. (States may enact stricter employee protection laws.) Whether a worker meets the Fair Labor Standards Act's definition of employee depends on the working relationship between the employer and the worker, not job title or any agreement that the parties may make.
On September 25, 2020, the U.S. Department of Labor (DOL) published in the Federal Register a proposed rule addressing how to determine whether a worker is an employee under the Fair Labor Standards Act (FLSA) or an independent contractor.
According to the fact sheet published by the DOL about the proposed rule, an employment relationship under the FLSA must be distinguished from a strictly contractual one.
Such a relationship must exist for any provision of the FLSA to apply to any person engaged in work which may otherwise be subject to the Act. In the application of the FLSA an employee, as distinguished from a person who is engaged in a business of his or her own, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves. The employer-
employee relationship under the FLSA is tested by "economic reality" rather than "technical concepts." It is not determined by the common law standards relating to master and servant.
The DOL Fact Sheet also points out that the U.S. Supreme Court has on a number of occasions indicated that there is no single rule or test for determining whether an individual is an independent contractor or an employee for purposes of the FLSA. The Court has held that it is the total activity or situation which controls what the determination will be. Among the factors which the Court has considered significant are:
- The extent to which the services rendered are an integral part of the principal's business.
- The permanency of the relationship.
- The amount of the alleged contractor's investment in facilities and equipment.
- The nature and degree of control by the principal.
- The alleged contractor's opportunities for profit and loss.
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
- The degree of independent business organization and operation.
There are certain factors which are immaterial in determining whether there is an employment relationship. Such facts as the place where work is performed, the absence of a formal employment agreement, or whether an alleged independent contractor is licensed by State/local government are not considered to have a bearing on determinations as to whether there is an employment relationship. Additionally, the Supreme Court has held that the time or mode of pay does not control the determination of employee status.
When it has been determined that an employer-employee relationship does exist, and the employee is engaged in work that is subject to the Act, it is required that the employee be paid at least the Federal minimum wage of $5.85 per hour effective July 24, 2007; $6.55 per hour effective July 24, 2008; and $7.25 per hour effective July 24, 2009, and in most cases overtime at time and one-half his/her regular rate of pay for all hours worked in excess of 40 per week. The Act also has youth employment provisions which regulate the employment of minors under the age of eighteen, as well as recordkeeping requirements.
These basic rules are of course subject to stricter interpretation according to individual state laws that may apply. If you have questions on classifying those who do work for you, please call us.
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In this issue:
This Just In...
Businesses Get Cited for COVID OSHA Violations
Gig Economy Gets Boost with Proposition 22 Win
DOL Publishes Proposed Rule to Redefine “Worker” Under FSLA
When is Someone an Independent Contractor — or Not?