Labor Department proposes definition for independent contractors for the first time ever

The U.S. Department of Labor on Tuesday announced a proposed rule that would define by way of a test whether workers are employees or independent contractors under the Fair Labor Standards Act.

The proposed change would base classification on an “economic reality test” focused primarily on whether the worker is economically dependent on the employer.

“Under this test, an individual is an employee if, as a matter of economic reality, he or she is economically dependent on the employer for work. A worker is an independent contractor if, as a matter of economic reality, he or she is in business for him or herself, as opposed to being economically dependent on an employer,” a senior department official said in a call with reporters on Tuesday.

‘Some workers prefer to be independent’

The rule, if implemented, could impact a fierce debate playing out across the country over the classification of gig economy workers such as ride hailing drivers for companies like Uber (UBER) and Lyft (LYFT), personal shoppers and food delivery drivers, as well as millions of other U.S. workers currently regarded as independent contractors. In its history, the FLSA has never defined the term “independent contractor,” leaving employers and employees to interpret the term based on state laws and legal decisions.

According to the Bureau of Labor Statistics (BLS) independent contractors made up 6.9% of total U.S. employment in May 2017. However, prior government studies have estimated that the BLS data falls short of identifying all such workers and that the total may exceed 10% of the country’s workforce.

In response to the proposed rule, an Uber spokesperson told Yahoo Finance that “Uber appreciates the Department’s focus on independent workers and is reviewing the proposed rule. Unlike AB5, which would eliminate work for hundreds of thousands of people, this rule recognizes that the majority of workers on platforms like Uber want to stay independent. Uber plans to build on this foundation by working with government to create new benefits and protections for all gig workers.”

The department official said the economic reality test would put the majority of weight on two core factors to determine if workers are economically dependent on someone else: First, the nature and degree of the worker control over the work. And second, the worker’s opportunity for profit or loss based on the initiative and/or investment of the worker.

Additional factors that can be applied as guideposts if the two core factors are not determinative include the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the potential employer, and whether the work is part of an integrated unit of production.

In California, which recently began categorizing gig economy workers as employees by adopting a more strict classification rule, AB-5, and for other states that have adopted more expansive laws governing worker classification, employers would still be required, for state purposes, to apply their more strict law. However, at the federal level, the analysis would be based on the labor department’s standard.

“How we would enforce that from the Department of Labor from the Wage and Hour Division would obviously be based on how we interpret the Fair Labor Standards Act,” another senior department official said.

In a op-ed published Tuesday by Fox News, Labor Department Secretary Eugene Scalia wrote, “Unlike AB-5, our rule doesn’t aim to slant the analysis toward classifying independent contractors as employees. In part, that’s because we recognize there are powerful reasons why some workers prefer to be independent, rather than accountable to a company as its employee.”

Department officials said they expect publication of the proposed rule in the federal register between late this week and early next week. Comments will be due 30 days after publication.

Alexis Keenan is a legal reporter for Yahoo Finance and former litigation attorney.

Follow Alexis Keenan on Twitter @alexiskweed.

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