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Federal law protects certain employees’ wage and benefits rights, especially those to minimum wage and overtime. Independent contractors, however, do not have the same rights and have more of an arm’s length relationship with the businesses or other kinds of employers who contract with them to provide services.

Misclassification is a big deal

Some employers try to get out of their wage-and-hour obligations to employees by misclassifying them as independent contractors.

But just because it’s an advantage to the employer, labeling someone as an independent contractor does not make it so. What matters is the relationship between the business and the working entity, the nature of the work and the characteristics of the working entity. As the old saying goes, “If it walks like a duck, quacks like a duck …” then it just might be an employee even though the employer is calling them a contractor.

Fair Labor Standards Act

The 1938 federal Fair Labor Standards Act (FLSA) is the source of overtime, minimum wage and similar rights for non-exempt employees (a different group of employees is exempt from these requirements). Much litigation has occurred over how to tell if a working relationship is one of employment or one of contract.

The FLSA defines “employ” as to “suffer or permit to work.” Articulating a test for the difference between an employee and a contractor under this broad language has been tried for decades by courts and by the DOL’s Wage and Hour Division (WHD), the agency tasked with enforcing this law and establishing rules to carry it out. Federal courts in different jurisdictions have used similar, but different tests, but usually a variation of the “economic reality” test.

Basically, the test asks whether the worker is in business for themselves (contractor) or dependent on the employer for work and wages (employee) by looking at a variety of aspects of the work and the relationship.

WHD proposing new regulations with one standard federal test

The WHD published a proposed rule on Sept. 25, 2020, which would establish by FLSA regulation a standard economic reality test. The test uses two “core factors” to help answer the question of whether the working entity is in business for themselves or is financially dependent on the employer.

Those core factors are the “nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on initiative and/or investment,” to quote a DOL news release.

Three more factors may be “additional guideposts”:

  • Skill required
  • Permanence of the professional or vocational relationship with the employer
  • Whether the work is “part of an integrated unit of production”

The WHD proposes defining this “integrated unit” factor as whether the worker’s tasks are the same or similar to those of the actual employees – whether the worker’s contribution is like being part of an assembly line beside the employees. If so, the person more likely should be classified as an employee.

On the other hand, if the work of the individual is comprised of “discrete, segregable services,” the services are not as integrated into the employer’s work, and the worker is more like a contractor.

Stay tuned

Written comments are due Oct. 26. We will keep an eye on whether the agency amends the proposed regulations or adopts them as proposed. Any Maryland worker facing a potential misclassification issue should speak with an experienced employment attorney for information and assistance.