Independent Contractor Status under the Fair Labor Standards Act, 29 CFR Parts 780, 788, and 795, 85 Fed. Reg. 60600 (Sept. 25, 2020); News Release: U.S. Department of Labor Proposes Rule to Clarify Employee and Independent Contractor Status Under the Fair Labor Standards Act (Sept. 22, 2020)
The DOL’s Wage and Hour Division (WHD) has proposed new regulations for determining whether a worker is an employee or an independent contractor for purposes of the Fair Labor Standards Act (FLSA). (Among other things, the FLSA governs minimum wage and overtime requirements that apply to employees but not independent contractors.) According to the DOL, the proposal is intended to provide clarity and consistency, making it easier to identify employees and independent contractors for FLSA purposes.
Under the proposal, status as an employee or independent contractor would be determined by looking to the “economic reality” of the relationship and asking whether workers are economically dependent on a putative employer for work, as distinguished from being in business for themselves. The primary focus would be on two “core” factors—the nature and degree of workers’ control over the work, such as by setting their work schedule, selecting projects, and being able to work for others; and workers’ opportunity for profit or loss based on their own initiative, investment, or both. Other factors, including the required skill level for the work and the permanence of the working relationship, would be given less weight. And the parties’ actual practice would be more relevant than what may be contractually or theoretically possible.
EBIA Comment: Few employee benefit plan rules rely on the FLSA’s employee definition. (One that does is the Affordable Care Act (ACA) requirement to furnish Exchange notices to employees.) For most employee benefit purposes, employee status is determined under ERISA or the Code, often in conjunction with the common-law standard. That standard considers many factors, essentially focusing on the degree of control that the service recipient (the putative employer) may exercise over the worker. Because the standards differ—with the FLSA’s being broader, as highlighted by the U.S. Supreme Court in Nationwide Mutual Ins. Co. v. Darden, 503 U.S. 318 (1992)—workers misclassified as independent contractors and later reclassified as employees for FLSA purposes might not be considered misclassified for other purposes. In any event, it is important to recognize the various issues at play. While employers have relatively wide latitude to design welfare plan eligibility and typically can exclude reclassified workers through carefully drafted provisions, proper classification is crucial for many requirements—such as Code provisions governing retirement plans, favorable tax treatment for various health and welfare benefits, nondiscrimination rules, and the ACA’s employer shared responsibility rules. For more information, see EBIA’s Health Care Reform manual at Section XXI.E.3.a (“Who Is an Employee for FLSA Purposes?”). See also EBIA’s ERISA Compliance manual at Section IX.I (“Eligibility Issues Involving Independent Contractors, Leased Employees, and Others”); EBIA’s Cafeteria Plans manual at Section IX (“Who Can Participate in a Cafeteria Plan?”); EBIA’s Self-Insured Health Plans manual at Section XIV.C (“Which Employees and Other Workers Will Be Allowed to Participate?”); and EBIA’s 401(k) Plans manual at Section VII.B (“Eligibility Condition #1: Participation Limited to Common-Law Employees, Partners and Sole Proprietors, Some Leased and Statutory Employees”).
Contributing Editors: EBIA Staff.