DOL Proposes New Regulations for Classifying Independent Contractors

The U.S. Department of Labor has proposed new regulations for classifying workers as independent contractors.

Proper classification of independent contractors has become more of an issue as more businesses engage in the gig economy. Companies who rely on gig workers like Uber, Lyft, and Instacart have been embroiled in litigation over which status is proper for their workers: independent contractor or employee? Businesses face significant liability for workers found to be misclassified as independent contractors.

The current federal test for independent contractor status requires examination of multiple factors, with no one factor carrying greater weight than the others. The DOL’s new proposed “economic reality” test requires examination of five factors, with two core factors carrying greater weight, and the other three serving as additional guideposts if a determination cannot be made using the core factors.

The DOL’s stated intent with the proposal was to shorten and simplify the current rule. Overall, the new test is viewed as more employer-friendly.

The DOL plans to finalize the new rule this year and has been criticized for allowing a 30-day comment period rather than the usual 60 or 90 days. Comments must be submitted on or before October 26, 2020, and can be submitted here. The new rule will not go into effect until after the DOL reviews the submitted comments and publishes a final rule.

Businesses must also comply with the Internal Revenue Service’s tests and state-specific independent contractor tests, not just the DOL test.

A minority of states follow a common law or “direction and control” test for determining worker status by examining, among other factors:

  • Behavioral control – exists when the Company supervises or dictates the manner in which the worker performs the work.
  • Financial control – exists when the business compensates the worker similarly to how it compensates employees, and when the worker is financially dependent on the business.
  • Relationship between the worker and the business – exists when the work performed by the worker is integral to the work of the business and when the worker is treated like other employees (e.g., receives employee benefits and follows employment-at-will rather than a contractual relationship).

A majority of states follow all or part of the “ABC test” for determining worker status by examining:

  • Absence of Control = the worker generally is free from the business’ supervision or control over how the work is performed. A signed independent contractor agreement is recommended as it can be helpful, but it is not determinative.
  • Business of the Worker = the work performed by the worker is tangential or unrelated to the work performed by the business.
  • Customarily Engaged = the worker has their own business identity and operates as an independent business in the market.

Do you have questions about whether your workers should be classified as independent contractors or employees under federal law and in the states you operate in? Contact us. We can help!