In response to the U.S. Department of Labor’s proposed regulation on independent contractor status under the Fair Labor Standards Act, over 1,500 individuals and organizations have already filed comments prior to the deadline at midnight tonight, October 26, 2020. [Publisher’s note 10.28.20: The total number of comments received exceeded 1,800 by the close of the comment period.] Those submitting comments in support of the proposed rule include the U.S. Chamber of Commerce and the National Association of Manufacturers; those opposed include the AFL-CIO, the Teamsters Union, and the National Employment Law Project. The comment period was only 30 days in duration. Regardless of the results of the upcoming election, it appears that the Labor Department will seek to issue a final rule before the end of this calendar year. The publisher of this legal blog filed comments as well, which are reproduced in their entirety below. They neither support nor oppose the proposed rule. Rather, they suggest the Labor Department make certain clarifications to the proposed rule; re-focus the regulation’s test for independent contractor status on the type of control deemed most relevant by the courts; de-emphasize the significance of skill or provide examples where less skilled workers can qualify for independent contractor status; include a recognition that permanence of work does not necessarily suggest employee status; and offer examples of some of the factors to be considered in determining whether a worker or group of workers should be classified as independent contractors or rather employees under the FLSA. At the conclusion of this post, we provide an analysis and offer readers a key takeaway: regardless of the issuance of the final rule impacting this particular federal law (the FLSA), companies should take steps to enhance their compliance with all applicable federal and state IC laws and thereby minimize their potential exposure to IC misclassification liability.
COMMENTS AS FILED BY THIS BLOG’S PUBLISHER[i]
Comment 1. The proposed rule only lists five factors to be considered, yet notes that those factors are not exhaustive. The final rule should list a number of other factors that should be considered in determining independent contractor vs. employee status.
Reasoning for this comment.
In proposed § 795.105, entitled “Determining employee and independent contractor classification under the FLSA,” paragraph (c) addresses how economic dependence is to be determined. It states:
“(c) Determining economic dependence. The economic reality factors in paragraph (d) of this section guide the determination of whether the relationship between an individual and a potential employer is one of economic dependence and therefore whether an individual is properly classified as an employee or independent contractor. These factors are not exhaustive, and no single factor is dispositive.” (Emphasis added.)
Paragraph (d) then addresses two “core factors” (the nature and degree of the individual’s control over his/her work, and the individual’s opportunity for profit or loss), and three “other factors” (the amount of skill required for the work, the degree of permanence of the working relationship, and whether the work is part of an integrated unit of production).
However, nowhere does the proposed regulation mention any other factors (besides the two “core” and three “other” factors) pertinent to the determination of independent contractor vs. employee status. Indeed, the courts have considered dozens of other factors which bear on the question of a worker’s independence, including whether the potential employer has the right to terminate the worker for any reason at any time; whether the worker has the right to accept or decline engagements; whether the parties are subject to an agreement indicating an intent to establish an independent contractor relationship; and whether the worker operates in the form of a corporate entity, including as a limited liability company.
The final rule should mention at least some of these or other additional factors the Department of Labor deems relevant; otherwise, many pertinent factors bearing on a worker’s classification are far less likely to be considered.
Comment 2. The title of the first “core factor” should be re-drafted in a manner that does not suggest it favors independent contractor status because the remaining text regarding this “core factor” is neutral.
Reasoning for this comment:
In proposed § 795.105, entitled “Determining employee and independent contractor classification under the FLSA,” paragraph (d) provides: “Economic reality factors—(1) Core factors—(i) The nature and degree of the individual’s control over the work.” (Emphasis added.)
Commentators have suggested that this reference to the “the individual’s control” instead of the “the potential employer’s control” focuses on the worker, not the potential employer. This commentator agrees; the word “the individual’s” should be deleted and replaced with the word “each party’s”.
To that end, the phrase should read instead: “(i) The nature and degree of each party’s control over the work.” (Emphasis added.)
Comment 3. The first “core factor” should be drafted in a manner that focuses attention on the key to control, which is control over the manner and means by which the work in question is performed. As drafted, the first core factor is ambiguous at best and may be misleading at worst.
Reasoning for this comment:
In proposed § 795.105 entitled “Determining employee and independent contractor classification under the FLSA,” paragraph (d) currently provides: “Economic reality factors—(1) Core factors—(i) The nature and degree of the individual’s control over the work.” (Emphasis added.)
The courts uniformly have focused on control over the manner and means of performance; i.e., how the work is to be performed. It is a given that the party that engages the worker always controls “what” work is to be performed and often when and where the work is to be performed. An independent contractor plumber retained by a managing agent of an apartment complex to unclog a drain or install a new toilet, for example, has to be told “what” to do and of course, when and where to perform his/her task. Thus, control over what, where, and when are not necessarily meaningful to an independent contractor analysis. If the potential employer, on the other hand, controls how the work is done or retains the right to do so, that factor would favor employee status. Thus, the wording of the proposed rule regarding control by a potential employer “over the work” is not particularly meaningful and may lead to erroneous conclusions as to whether workers are employees or independent contractors.
If the language change suggested in the second comment above is adopted, the first “core factor” should be further revised to read as follows: “Economic reality factors—(1) Core factors—(i) The nature and degree of each party’s control over the performance of the work, particularly how the work is to be performed.” (Emphasis added.)
Comment 4. The second of the two “core factors” focuses on the individual’s opportunity for profit or loss, but the text only mentions how the worker can generate profit. This core factor should give attention to loss as well.
Reasoning for this comment:
The second of the two “core factors” reads as follows in the proposed rule:
(ii) The individual’s opportunity for profit or loss. This factor weighs towards the individual being an independent contractor to the extent the individual has an opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen or judgment) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work. While the effects of the individual’s exercise of initiative and management of investment are both considered under this factor, the individual does not need to have an opportunity for profit or loss based on both for this factor to weigh towards the individual being an independent contractor. This factor weighs towards the individual being an employee to the extent the individual is unable to affect his or her earnings or is only able to do so by working more hours or more efficiently.
The above language focuses on profit and fails to give any attention to or description of the types of losses that bear on the independent contractor status of the worker. Many factors can create loss. A worker can be subject to loss if, for example, he or she has to re-do work that is not consistent with industry standards or does not meet a customer’s expectations; is potentially liable to the potential employer in the event his or her actions or inactions cause harm or legal expense to the potential employer; or fails to render services in a cost-efficient manner by not managing expenses or investing far too much time on activities that are unproductive.
Examples of loss should be identified in this “core factor” discussion so it is clear it does not focus only on profit.
Comment 5. The “other factor” pertaining to skill overstates the importance of the factor. Skill can be a meaningful factor in determining independent contractor status, but often is not.
Reasoning for this comment:
The first of the three “other factors” pertains to skill. Proposed subparagraph (2) provides:
“Other factors—(i) The amount of skill required for the work. This factor weighs in favor of the individual being an independent contractor to the extent the work at issue requires specialized training or skill that the potential employer does not provide. This factor weighs in favor of the individual being an employee to the extent the work at issue requires no specialized training or skill and/or the individual is dependent upon the potential employer to equip him or her with any skills or training necessary to perform the job.”
This factor, as drafted, overstates the importance of skill. Highly skilled physicians can be either employees or independent contractors. The same is true with many others including lawyers, architects, and engineers. Likewise, a limousine or “black car” driver may have limited skills, but can be an independent contractor or an employee. if he or she purchases a right to be offered engagements for private rides and exercises his or her contractual rights in a manner that turns a profit, without being subject to any control by the potential employer over how the driver performs his or her work.
The proposed rule as drafted gives too much emphasis on whether the position requires specialized training or skill. At a bare minimum, the final rule should at least indicate that this may be a relevant factor in some but not all instances.
It is also suggested that the last sentence be changed by substituting the word “and” for the words “and/or”, as follows: “This factor weighs in favor of the individual being an employee to the extent the work at issue requires no specialized training or skill and/or the individual is dependent upon the potential employer to equip him or her with any skills or training necessary to perform the job.” (Emphasis added.)
Comment 6. The proposed rule oversimplifies the “other factor” pertaining to permanence of the working relationship.
Reasoning for this comment:
The second of the three “other factors” in the proposed rule states as follows:
“(ii) The degree of permanence of the working relationship between the individual and the potential employer. This factor weighs in favor of the individual being an independent contractor to the extent the work relationship is by design definite in duration or sporadic, which may include regularly occurring fixed periods of work, although the seasonal nature of work by itself would not necessarily indicate independent contractor classification. This factor weighs in favor of the individual being an employee to the extent the work relationship is instead by design indefinite in duration or continuous.” (Emphasis added.)
This factor, as drafted, reads as if the only type of independent contractor engagement contemplated by the proposed rule is project-based. There are many other legitimate independent contractor relationships and a host of them are indefinite in duration. Some examples include a gardener who has provided service weekly to a homeowner for 20 years; a distributor who has chosen to operate his or her own business exclusively distributing another company’s products; and a tutor who has provided frequent tutoring services to the same family’s children throughout their school years.
The “other factor” dealing with permanence should acknowledge that while permanence may indicate employee status, a worker’s decision to continue a profitable continuous relationship with the same company does not necessarily suggest employee status.
Comment 7. The “other factor” relating to the nature of the work in relation to the potential employer’s business is unclear and, as such, not likely to provide meaningful guidance.
Reasoning for this comment:
The language of the proposed rule relating to the third of the three “other factors” states:
“(iii) Whether the work is part of an integrated unit of production. This factor weighs in favor of the individual being an employee to the extent his or her work is a component of the potential employer’s integrated production process for a good or service. This factor weighs in favor of an individual being an independent contractor to the extent his or her work is segregable from the potential employer’s production process. This factor is different from the concept of the importance or centrality of the individual’s work to the potential employer’s business.” (Emphasis added.)
This final factor recasts what the Labor Department currently states in its Fact Sheet 13 as “the extent to which the services rendered are an integral part of the principal’s business.” In the proposed rule, this factor is now characterized as whether the work “is part of an integrated unit of production.” As the proposed rule states: “This factor is different from the concept of the importance or centrality of the individual’s work to the potential employer’s business.” The meaning of the words in bold type in the third “other factor” are at best unclear. Many types of services have little or nothing to do with “production” let alone an “integrated unit of production.” This factor should be explained and the Labor Department should use terms of art or words that are commonly understood.
It should also be noted that this factor, which in the past was referred to as “integral to the principal’s business,” has historically has been given little weight by the courts.
END OF FORMAL COMMENTS
Analysis and Takeaway
The proposed regulation was informally released to the public on October 22, 2020. We issued an extensive blog post later that day entitled “Much Ado About (Almost) Nothing: The Labor Department’s New Proposed Independent Contractor Classification Rule.” We analyzed the proposed regulation, and described what it said and what it meant for businesses that use independent contractors as part of their business model. We explained that, in our view, it meant little for a number of reasons. Why?
First, depending on the election results, the rule may never become final. Second, it may be stricken down by a reviewing court or a new Congress. Third, it may be reissued in a different form under a new administration. Fourth, regulations are not law, and some courts may choose not to give deference to a final rule issued by the Department of Labor. Fifth, many class action lawsuits are brought under state laws, and most state laws have different tests for IC status than does the FLSA. Sixth, state workforce regulatory agencies are not bound to follow a regulation issued by the federal government.
What does all this mean to businesses and self-employed individuals that wish to create and maintain a legitimate IC relationship? Irrespective of the content of a final rule – if one is ever issued – claims of IC misclassification are not likely to subside. Many businesses that make substantial use of ICs have utilized a process such as IC Diagnostics™ to elevate their level of compliance with applicable federal and state IC laws and minimize their exposure to costly IC misclassification liability. This entails some restructuring or re-documenting of IC relationships to enhance compliance in a customized and sustainable manner, consistent with a company’s existing business model. IC Diagnostics™ also includes arbitration agreements with ICs that include class action waivers and are drafted in an effective manner. These types of actions require a company’s investment of time and energy in order to create long-term compliance benefits.
Written by Richard Reibstein
[i] The credentials of the publisher in support of his comments have been omitted in this blog post. The comments include the following: “These comments are submitted in response to the ‘Notice of Proposed Rulemaking: Independent Contractor Status under the Fair Labor Standards Act.’ They are being submitted by Richard Reibstein, a partner in the law firm of Locke Lord LLP. The comments below are attributable solely to Mr. Reibstein and are not intended to reflect the views of Locke Lord LLP, other lawyers at the firm, or clients of the firm.