US DOL’s Proposed IC Rule

Earlier this week the US Department of Labor announced a notice of proposed rulemaking about independent contractor status. The proposal would put into rule a 5-factor test for determining whether a worker is an independent contractor. That 5-factor test is known as an Economic Realities test. The public now has 30 days to offer comments and critiques of the proposed rule.

My read of the proposal is it is a modest improvement, but it still has a couple of serious flaws that need to be addressed through the comment phase.

Keep in mind a couple of background points:

  • The US DOL could not adopt a wholly new rule. This proposal is for the Fair Labor Standards Act (think wage and hour claims and overtime claims). This proposal does not impact workers compensation, unemployment insurance, taxes, or other employment laws. Because the rule only applies to the FLSA it must work with the language Congress put in the FLSA. The US DOL cannot adopt a new test without Congress changing the FLSA. The US DOL must work within the case law surrounding the FLSA.
  • The FLSA says an employer employs someone when they “suffer or permit them to work.” No one really knew what that meant so the courts had to fill in the holes. In the 1940’s and 1950’s the US Supreme Court used an Economic Realities test to determine what “suffer or permit to work” meant. Since then courts and agencies have interpreted and warped those original decisions many times over. Some courts weighed the 5 factors one way, and other courts did it another way. The US DOL’s proposed rule tries to settle those court differences by clarifying what the 5 factors are, how they should be interpreted, and how much weight each should be given.
  • There are a number of tests to determine IC status around the country. There are industry-specific tests, there are common law control tests (think IRS factor test), there are versions of the Economic Realities test, and there are versions of the ABC test. From industry’s perspective, generally speaking, the industry specific tests are best, followed by common law control tests, then the Economic Realities test and finally the ABC test. The US DOL is trying to clarify the second-worst test for industry. They cannot adopt a more friendly control test or adopt a series of industry-specific tests without facing a mountain of challenges in court.
  • The rule applies to all industries. The DOL did not write a rule with one industry in mind. To survive legal challenges they had to craft a rule for all industries.
  • The proposed Economic Realities test is now an analysis of five factors (some earlier versions of the test had 6 factors; this version cleans up some overlap and settles on five factors):
    1. The amount of control
    2. The worker’s opportunity for profit or loss based on their own merit
    3. The skill involved
    4. The permanence of the relationship
    5. The integration of the work

The US DOL’s version of the Economic Realities test does a couple of good things:

  • It puts the most weight on the control and profit and loss factors. If an employer wins on those 2 points they will likely win the case. If they lose on those two points, they will likely lose the case. If the 2 points conflict or do not strongly favor one outcome, then the last 3 factors will be considered. As an employer it will be important to focus on not exercising too much control and making sure the worker has the ability to earn a profit or suffer a loss based on their own merits as a business owner.
  • It adds some good clarity on control. For example, control for safety purposes would not be heavily counted against the employer.
  • It adds some good clarity on profit and loss. It lessens the weight put on the amount of investment the worker puts in. In today’s economy many independent contractors are in business for themselves with little investment. Often a laptop and a cell phone are enough to put a person in business. The proposed rule would not require hundreds of thousands of dollars in investment to be considered an independent contractor.
  • It includes sensible guidance when it comes to skill, permanence, and integration. For example, the new rule does not adopt the ABC version of integration. You may recall a big problem with the ABC test is the “B” prong which says the worker can’t be engaged in an integral part of the employer’s business. This proposed rule throws that thinking out the window and instead says the analysis should be on whether the worker could still be in business without the employer’s presence.

However, the proposed rule has some significant weaknesses that need to be corrected:

  • The proposed rule says it will focus on how the relationship works in real life rather than what is in the contract. They did this because there is a long chain of case law about joint employer status that has penalized franchisors for having contractual rights to require franchisees to behave certain ways even though the franchisors did not actually enforce those contract rights. That’s nice for joint employer purposes, but for IC status purposes that isn’t good. As just one example, many IC agreements give ICs rights to turn down assignments and do work for others. But many ICs choose to take all the work they get offered by one client because they are happy with that arrangement. They aren’t prevented from doing more for others, but they freely choose not to do more work for others. The proposed rule says an employer cannot prevent a worker from exercising contractual rights. Comments need to be submitted to the DOL explaining that it is NOT a sign of employment if workers choose to not exercise their contractual rights and the burden of proof is on the worker to prove they tried to exercise their rights and were prohibited from doing so by the employer.
  • The proposed rule needs to take into consideration the impact other government rules have on the ability for the worker to earn a profit or suffer a loss. Take the Truth-In-Leasing regulations as an example. The leasing regulations say a truck must be leased exclusively to the motor carrier for the duration of the lease. There are some exceptions to the rule, but they are cumbersome at best to take advantage of, and practically speaking the leasing regulations strongly discourage an owner operator from taking his or her truck from one carrier to the next each day. Employers and workers should not be penalized for complying with the leasing regulations.

Suffice it to say, the rule still needs work. I will be working with other leaders within the Minnesota Trucking Association to submit comments on behalf of the MTA to the DOL. I know the American Trucking Association will submit comments as well, and so will most other state and national trade associations. Believe it or not, the agencies do review the comments (by law they must review them) and take them into consideration as they finalize the rule. I encourage you to submit comments as well, and to include specific scenarios that will show the agency how the proposal would impact your business and your ICs that want to be independent. If you need any help with comments, or if you have any questions about the proposed rule, I’ll be happy to help.