November 2022 Volume 4

OPERATIONS & MANAGEMENT

A New Rule for Independent Contractor Status? By Johanna Fabrizio Parker

Back in my first article for the magazine, I talked about who was – or was not – an independent contractor. In short, it’s more than a name. And there are various tests depending on the legal question, e.g., tax status, labor law. OnOctober 13, 2022, the federal government issued a newproposed rule to determine who is or is not an independent contractor for purposes of the Federal Labor Standards Act (“FLSA”). The FLSA is the federal law concerning wages and hours of work. But it applies only to “employees” and not to independent contractors. Under the Trump administration, the Department of Labor (“DOL”) issued a new rule as to who should be considered an independent contractor. Under that rule, there were two “core factors” designated, practically, as controlling the analysis: (a) the nature and degree of control over the work; and (b) the worker’s opportunity for profit or loss. The rule also identified the following three non-core factors: (i) the amount of skill required for the work; (ii) the degree of permanence in the working relationship; and (iii) is the work part of an integrated unit of production. However, the DOL instructed that it was “highly unlikely” that these non core factors could outweigh the two core factors. I read the non core factors as potentially more problematic for parties (whether individuals or companies) to uphold the independent contractor status. Or more simply stated, without having to consider these non-core factors, it is generally easier to sustain the independent contractor relationship.

The new proposed rule would do away with the Trump administration test and go back to the “economic realities” test. The economic realities test has six factors, and it is a “totality of circumstances” test. In other words, the following factors are all considered, but no one controls: 1. The individual’s opportunities for profit or loss dependent on his/her managerial skill. Here, the evaluation looks at factors such as: (a) can the individual negotiate the price for the work; (b) can the individual choose to accept or decline jobs; (c) can the individual choose the order/time of jobs; (d) does the individual engage in marketing to expand his/her business; and (e) does the individual decide to hire other, purchase materials, and/or rent space. The more times the answer is yes (or leaning toward yes), the more the individual looks like an independent contractor and not an employee. 2. Investments by the individual and company/employer. Here, the key question is: does the individual make any investments to support his/her business? The court (or other evaluator) is looking for investments that are capital or entrepreneurial in nature to support independent contractor status. 3. Degree of permanence of the work relationship. If the relationship is indefinite or continuous, and/or exclusive, the individual looks more like an employee.

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