Contractor vs. Classifications

Contractor v. employee violations occur in every industry. This is in part due to the regulatory processes in wage rates, labor agreements, and exemptions defining who is and who isn’t an independent contractor.

To paraphrase a genial and genuinely funny former US President, I’m from the government, and I’m here to help!

The FLSA is the preeminent law governing wage and salary classifications and overtime. Many states, and even some municipalities, have their own laws. Some of these laws mirror the FLSA’s definitions, while some have their own distinct definitions. In other words, they may weigh some factors more than others, exempt certain industries, or give greater deference to different factors than those assessed by the DOL.

The new rule, like previous proposed rules and guidance, aims to clear up ambiguity and confusion among businesses, employees, and the public while maintaining currency with the evolving gig economy. As with current guidance, businesses and employees will search for loopholes to avoid employment taxes and overtime, continuing a cycle of interpretation and enforcement.

As a labor and employment lawyer representing business, I’ve seen many employers rely on independent contractors to avoid payroll taxes and overtime, while the government aims to ensure tax compliance and proper classification.

The proposed rule is long, with analysis and citations. The exact length is less important than understanding the quantity of information and thought behind this rule. My aim here is to distill it into a few paragraphs.

I won’t detail the prior history since that’s a tedious analysis of withdrawn and rewritten guidance. If they weren’t good enough for the government, they’re not good enough for this discussion.

In my view, most contractor-vs-employee violations occur in the construction industry. This is partly due to labyrinthian regulatory processes in wage rates, labor agreements, and exemptions for certain subindustries, where different levels of government define who is and isn’t an independent contractor. Federal, state, and local agencies regulate classification—the IRS, state unemployment compensation, and local wage-and-hour agencies.

Much of what’s enacted or implemented is based on DOL guidance and court rulings upholding USDOL guidance. The DOL’s investigators, supervisors, and lawyers report what’s happening in the field to agency heads. This information competes with input from businesses, lobbyists, special interest groups, and sometimes consumers. The DOL mixes it all up and often influences or creates a complex mix of legislation and rule making.

In the big picture, the same factors will apply to determining worker classification as under prior guidance — with the usual caveat that policy shifts and enforcement priorities evolve. The core factors include the control the principal has over the contractor and the contractor’s ability to impact profit and loss. Questions include whether the contractor works for other principals, whether they market their services, and, to a lesser extent, work location, tools used, and control over processes and methods.

As always, the focus is on whether a worker is economically dependent on the client or is in business for themselves. The DOL will consider the totality of circumstances, with less weight given to any single factor. We’re still discussing the same five central factors, though their relative importance may vary by context.

Keep in mind a key principle in this analysis: there is no single definition that solves all problems in the employer-employee relationship under the FLSA. Courts rely on a broad, multifactor economic reality analysis derived from precedent. The economic reality test focuses on a worker’s economic dependence on an employer, considering the totality of the circumstances. Rutherford Food Corp. v. McComb, 331 U.S. 722, 729 (1947).

If we drill down, the test centers on five primary factors per United States v. Silk, 331 U.S. 704 (1947):

• the amount of control the employer has over the contractor
• the contractor’s…