ILMA Compoundings - October 2020 - 45

WASHINGTON LANDSCAPE

DoL Looks to 'Economic
Reality' to Define
Independent Contractors
By Matthew Levetown

F

or the first time, the U.S. Department of Labor (DoL) has proposed
a rule to clarify when a worker is
an independent contractor versus an
employee. Despite the importance of
resolving the employee-independent
contractor dispute and its implications
for employers, the federal government
up to now has relied on a combination
of agency guidance and judicial opinions
to resolve the question. Misclassification
of employees as independent contractors
is a major source of disputes under the
Fair Labor Standards Act (FLSA), which
the government has a vested interest in
resolving - after all, fewer employees
means less tax revenue for state and
federal coffers.
The employee-independent contractor debate recently reached a head
following California's implementation
of AB5, which reclassified a number
of workers as employees unless an
employer could rebut the presumption
under a strict test modeled after a
federal court decision. Other states,
such as Massachusetts, New Jersey
and Connecticut, have adopted some
version of the same test, albeit none
as strict as California. Following an
August court decision, Lyft and Uber
were ordered to reclassify drivers as
employees, entitling drivers to company retirement and health insurance
plans - and, in the midst of the
COVID-19 pandemic, paid sick leave.

Under a number of judicial opinions interpreting the FLSA, employers
are forced to contend with a series of
"hypothetical" factors to determine
whether a worker is an employee or an
independent contractor. The factors
include important questions such as
whether an employer could control
the performance of work, whether
the work performed is temporary,
and ownership of the equipment used
by a worker. Things that may seem
important, such as state licensure as
an independent contractor, have been
considered irrelevant in the actual
calculus employed by the DoL. The
proposed rule, if finalized and upheld
in court, would mark the first time
since passage of the FLSA in 1938
that a consistent national independent
contractor test has been defined by
enforceable rule.
'ECONOMIC REALITY'
The proposed rule would codify what
the DoL refers to as its "economic
reality" rule, which has floated around
in guidance documents since the
1950s. A series of Supreme Court
cases in the late 1940s interpreting the
Social Security Act, FLSA and other
workers' rights laws arrived at a test
that can be summed up as defining
an employee as "a worker who is
dependent as a matter of economic
reality on the business for which they
render service." As the proposed rule

frames the clear objection to this
test: "all workers - employees and
independent contractors alike - are
economically dependent on others to
some degree."
With that in mind, the DoL is
proposing a relatively simple rule,
with five factors to guide the ultimate
determination of a worker's status. An
independent contractor is someone
who, as a matter of economic reality,
is in business for themselves. The DoL
proposes two "core" factors, which,
when pointing toward either employee
or independent contractor, are highly
indicative of a worker's status, but not

45



ILMA Compoundings - October 2020

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ILMA Compoundings - October 2020 - Cover2
ILMA Compoundings - October 2020 - 1
ILMA Compoundings - October 2020 - 2
ILMA Compoundings - October 2020 - 3
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ILMA Compoundings - October 2020 - 5
ILMA Compoundings - October 2020 - 6
ILMA Compoundings - October 2020 - 7
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