New final rule from Labor to clarify independent contractor status

Whether a worker is an 'employee” or an 'independent contractor” is one of the most important questions in employment law.

Both are terms for people who get paid to perform work, but they also represent key distinctions in the nature of the working relationship that carry major legal consequences.

For example, only employees covered by the Fair Labor Standards Act are entitled to overtime pay.

Employees are also protected by workers' compensation laws, while independent contractors are generally not.

The recent boom in remote work arrangements and the gig economy, or short-term jobs, once again has brought the distinction between employees and contractors to the forefront.

On Jan. 6, the U.S. Department of Labor announced a new rule intended to bring some clarity as to who is an employee and who is an independent contractor.

First, the rule reaffirms the traditional 'economic reality” test, which asks whether a worker is in business for herself (suggesting she is an independent contractor) or economically dependent on another entity for work (suggesting she is an employee).

Most courts already use this test or a version of it.

However, the DOL's rule identifies two new 'core factors” to help determine whether the worker is in business for herself:

' What is the nature and degree of the worker's control over the work?

' Does the worker have the opportunity to profit or lose based on initiative or investment?

These factors reflect those pioneered by early court decisions attempting to sort out whether gig economy workers are employees or contractors.

Uber, for example, won a lawsuit in Pennsylvania several years ago when a federal judge ruled that Uber did not exert enough control over its drivers to be considered their employer.

The judge noted that the drivers only worked when they want to, and were free to nap, run personal errands or smoke cigarettes in between rides.

The DOL's new rule also identifies three other factors that employers and courts may use as guideposts when the two 'core factors” do not resolve the question:

' How much skill is required for the work?

' How permanent is the working relationship between the worker and the person paying for the work?

' Is the work part of an integrated unit of production?

When evaluating these factors together, the DOL instructs that the focus should be on the actual working relationship and not what may be contractually or theoretically possible.

The new rule takes effect March 8. But employers already should be mindful about the distinction between employees and contractors.

What kind of workforce you have represents a calculated business risk.

If you or your company seek to hire an independent contractor, know the red flags that many employers ignore.

Be careful of hiring former employees under the title of 'independent contractor” to perform the same job as before - these personnel probably will be employees as a matter of law.

You also should be careful of hiring independent contractors to do the same job as your employees.

In addition, keep independent contractor records in vendor files, not employee files, and require that independent contractors submit invoices to you for payment.

Wilford H. Stone is a lawyer with Lynch Dallas in Cedar Rapids.