The U.S. Department of Labor (DOL) is revising its interpretation of independent contractor status under the Fair Labor Standards Act (FLSA), which could open the door for federal challenges to Assembly Bill (AB) 5.
“Once finalized, it will make it easier to identify employees covered by the Act, while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor,” said Secretary of Labor Eugene Scalia in a statement online.
The proposed rule is expected to promote innovation and reduce litigation, according to the Federal Register. Public comments are due October 26, 2020.
“It could only take hold in California for federal cases because in California you have to apply California law unless it’s a company that has employees in various States and is sued or has sued under federal law,” said Nina Yablok, an employment law attorney who practiced for 40 years in California and wrote a blog about the proposed rule. “California is not very business-friendly.”
As previously reported, when AB 5 became effective Jan. 1, 2020, it forced companies to reclassify many independent contractors, such as Uber and Lyft drivers, photographers, freelance writers and other gig-economy workers, as employees.
“There have already been attacks on AB 5 in terms of lobbying groups and lawsuits,” Yablok said in an interview. “The legislature has, on its own, made some changes already and Californians can keep on fighting for their right to be independent contractors and to use independent contractors.”
If the proposed DOL rule is approved, a 5-prong economic reality test would be employed to determine a worker’s status as either an employee defined under the FLSA or an independent contractor.
The five prongs include:
The nature and degree of the individual's control over the work.
“Independent means that you have control over what you're doing,” said Yablok. “The fundamental economic reality is someone who is really an independent business person controls how they do business.”
The individual's opportunity for profit or loss
“That gets to the heart of being in business because employees cannot suffer an economic loss,” Yablok said. “They can lose their job but if the company has a bad month, they still get their salary whereas if you're an entrepreneur, you could have a bad month. You could have a bad year. You could work on a project where you lose money. This is the heart of entrepreneurship. It's about risk-taking a risk.”
The amount of skill required for the work.
“If a person has a high level of skill, they can be more independent,” said Yablok. “They don't need someone standing over them. They don't need to be monitored or checked and it's possible that the company may not even know how they do their work as is often the case with attorneys.”
The degree of permanence of the working relationship between the individual and the potential employer.
“Permanence is something very easy to measure,” Yablok said. “How long has this person been with you full-time or part-time, which does reflect how dependent the worker is on that one company. It’s dependence analysis that is not as easy to grasp as the Department of Labor says.”
Whether the work is part of an integrated production
“It's important because if you're contributing to what the company sells, the company is going to want to control what you do a lot more closely,” said Yablok. “People who are doing something totally unrelated to what the company sells will have a better chance of being an independent contractor.”