Who is an Employee and Who is a Contractor? The DOL Has New Guidelines

On September 22, the U.S. Department of Labor (DOL) proposed a new regulation to define when employees are covered by the Fair Labor Standards Act (FLSA). With the rise of the gig economy and increasing numbers of contract workers, the distinction between a regular employee and an independent contractor is not always clear. The proposed rule aims to fix that issue.

The proposed ruling would make it easier to define who a contractor worker is without interfering with state-specific contract laws.

So what does the current proposal change?

A revised Economic Reality Test

The primary updates suggested in the DOL proposal reshuffle the Economic Reality Test. If a worker is considered an employee under this set of criteria, then under the FSLA they are entitled to protections such as the federal minimum wage and overtime. 

In the past, the Economic Reality Test has looked equally at the following factors when determining who is an employee and who is a contractor:

• Whether the worker’s skills are specialized
• The duration of the relationship between the employer and worker. Is it permanent or temporary?
• How much control does the employer have over the worker
• How much the worker is affected by the profit or loss of the initiative
• Whether the work is part of an integral to the company or project.

In short, a worker who is defined as an employee, as opposed to an independent contractor, is completely reliant on their hiring company. 

The proposed changes would give far greater weight the following factors:

• How much control does the employer have over the worker?
• How much the worker is affected by the profit or loss of the initiative.

This means that now it matters more whether the worker has control over their schedule and being able to choose assignments. The new Economic Reality Test will put more emphasis on whether the employer supervises the worker or not, and whether the worker will also be able to work with other companies or even competitors. The less control of a worker the hiring party has, the more likely the worker is a contractor and not an employee. 

The second criteria suggest that a worker is a contractor if they would face profit or loss from their personal initiative or in managing investments — such as equipment or personnel — related to the work. For a clearer example of this, consider how independent contractors typically must supply their own tools and possibly staff to complete a project. Meanwhile, an employee would simply use the resources made available by their company. 

One other major change is that the DOL has changed the term “integral” to “integrated” unit when it comes to defining how vital and embedded the worker is in the project. While this factor doesn’t hold as much importance as the previously mentioned criteria, this change better defines how dependent a worker might be on their employer and vice versa. The more important and embedded a worker is in the workplace, the more likely it is that they are an employee and not a contractor. 

What this means for your business

The DOL has given the public 30 days to file a comment. This proposal, if finalized, will not affect state laws like California’s AB-5. However, it will make it easier for employers to determine whether or not a specific worker is an employee or an independent contractor. 

Ideally, the proposal will help businesses better navigate their hiring and employment classifications while making it clear to both employers and workers who is defined as an employee and who is an independent contractor. Clearcut criteria can also help employers avoid potential lawsuits for misclassifying their employees as independent contractors.