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On September 22, the Department of Labor proposed a new rule for determining whether a worker is an independent contractor or an employee. If it goes into effect, here’s how it will change the employee / independent contractor analysis.

Independent Contractor vs. Employee

You probably already know this, but here’s a quick refresher. Independent contractors are typically their own business—they provide their own tools/equipment, they decide their own schedule, and the businesses with whom they contract can’t control the ways they perform their work. Independent contractors don’t get the same legal protections as employees and they don’t earn the same benefits. Employees, on the other hand, are subject to their employer’s control regarding their work duties and how they are performed, typically earn benefits like PTO and insurance, and have no set end date.

Why does it matter?

Independent contractors aren’t protected by employment laws the way employees are. Most notably, they aren’t protected by the Fair Labor Standards Act (FLSA), which requires employers to pay employees at least the federal minimum wage for all hours worked, plus overtime for all hours worked beyond 40 hours in a workweek.

What’s the proposed rule?

The proposed rule is intended to be a clearer and easier way for employers and courts to determine which workers are independent contractors and which are employees. The ultimate inquiry is whether the employer is economically dependent on the employee. This is known as an “economic reality” test. There are two core factors in determining economic dependence: (1) the nature and degree of the individual’s control over the work; and (2) the individual’s opportunity for profit or loss. This means if the worker exercises substantial control over key aspects of their work, like setting their own schedule, selecting their projects, and maintaining the ability to work for other businesses (including potential competitors), they are most likely an independent contractor. Similarly, if the worker has the opportunity to earn profits or incur losses based on their work, they are probably an independent contractor. The other factors to consider (though less important than the core factors) are: the amount of skill required for the work, the degree of permanence of the working relationship between the individual and the potential employer, and whether the work is part of an integrated unit of production, meaning the work can’t be separated from the business’s production process.

What’s the difference?

The main difference in the new rule is that it focuses on the two “core factors,” as opposed to a holistic evaluation of all relevant factors.

When is this happening?

The new rule is scheduled for publication on September 25, 2020, and stakeholders will have 30 days from publication to comment. It is likely the DOL will aim to finalize the rule prior to any potential change in administration.

Thompson Coe and myHRgenius Tip of the Week is not intended as a solicitation, does not constitute legal advice, and does not establish an attorney-client relationship.


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