Employment Law Update

The U.S. Department of Labor (“DOL”) published its final rule for determining whether a worker is an employee or independent contractor under the federal Fair Labor Standards Act (“FLSA”)(89 FR 1638).  This is important to employers and workers because employees are subject to the FLSA (including its minimum wage, overtime, and recordkeeping requirements), while independent contractors are not.  The new DOL rule rescinds and replaces a prior rule, issued in January 2021 during the Trump Administration, seen as more favorable to employers.

The new rule returns to the analysis followed by the DOL prior to the Trump Administration rule.  That analysis centers on whether a worker is an employee or independent contractor under an “economic reality” test.  According to the DOL, “economic dependence is the ultimate inquiry, meaning that a worker is an independent contractor as opposed to an employee under the FLSA if the worker is, as a matter of economic reality, in business for themself.”

Under the final rule, to determine if a worker is an employee or an independent contractor, six factors must be considered, to perform a “totality-of-the-circumstances analysis:”

1. The worker’s opportunity for profit or loss depending on managerial skill;
2. Investments by the worker and the employer;
3. The degree of permanence of the work relationship;
4. The nature and degree of the employer’s control;
5. The extent the work performed is an integral part of the employer’s business; and,
6. The worker’s skill and initiative.

No one factor is given greater weight than another and the factors are not exclusive.  According to the DOL, the purpose of the final rule is “to reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves.”

Changes in the Final Rule

On October 13, 2022, the DOL published a Notice of Proposed Rulemaking (“NOPR”) regarding its six-factor approach to determining whether a worker is an employee subject to the FLSA or an independent contractor (87 FR 62218). The DOL reported receiving 55,400 comments in response to the NOPR.  The final rule does not adopt significant changes to the proposed rule.  Two modifications were highlighted by the DOL.  First, the final rule states that a potential employer’s actions taken for the sole purpose of complying with specific federal, state or local law or regulations does not indicate employer “control.”  Second, the final rule now states that costs borne by a worker which are unilaterally imposed by a potential employer are not “investments” by a worker that would indicate independent contractor status. 

History of the Employee-Independent Contractor Classification Issue

The FLSA was enacted in 1938 to eradicate “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers.”  20 U.S.C. §202.  The FLSA generally requires employers to pay nonexempt employees at least the federal minimum wage for all hours worked, to pay at least one and one-half times the employee’s regular rate of pay for each hour over 40 worked and to meet certain recordkeeping requirements. 

The FLSA does not define “independent contractor” although it has expansive definitions of “employer,” “employee” and “employ.”   Since the 1940s, the DOL and courts have applied an economic reality test to determine if a worker is an employee or independent contractor under the FLSA.  In applying this test, “the ultimate inquiry is whether, as a matter of economic reality, the worker is economically dependent on the employer for work (and is thus an employee) or is in business for themselves (and is thus an independent contractor).”   

In January 2021, the DOL published a final rule on employee/independent contractor classification

In issuing the Final Rule, the DOL rescinded a prior rule adopted in January 2021 in the final days of the Trump Administration.  Under the prior rule, the economic reality test focused on five factors:

1. The worker’s opportunity for profit or loss;
2. The nature and degree of control over the work;
3. The permanence of the work relationship;
4. The skill required for the work; and,
5. Whether the work is part of an integrated unit of production.

Two of the five factors—the nature and degree of control over the work and the worker’s opportunity for profit or loss—were deemed “core factors” that were the most probative and carried greater weight in the analysis.  If these “core factors” supported the same classification, then there was a substantial likelihood that it was the worker’s accurate classification.  The prior rule stated that it was “highly unlikely” that the three non-core factors could outweigh the combined probative value of the two core factors.

According to the Labor Department, the prior rule did not fully follow the FLSA’s text and purpose as interpreted by courts and “departed from decades of case law applying the economic reality test.”

The DOL Independent Contractor Rule Has Been Challenged in the Courts

Several court cases challenging the Rule may delay its implementation or overturn the rule in its entirety.
In Warren v. U.S. Department of Labor, four freelance workers have challenged the new rule in an action filed in the U.S. District Court for the Norther District of Georgia.  The plaintiffs allege that the rule is unconstitutionally vague, arbitrary and capricious and that in adopting the final rule the DOL exceeded its statutory authority.

In Coalition for Workforce Innovation v. Su, building industry and financial services trade groups are requesting that the U.S. Court of Appeals for the Fifth Circuit remand their pending case challenging the DOL’s decision to delay and withdraw the 2021 independent contractor rule and remand their case to the U.S. District Court to consider whether the new rule violates the Administrative Procedure Act.

In Frisard’s Transportation, LLC v U.S. Department of Labor, the Liberty Justice Center and Pelican Institute for Public Policy, on behalf of a family-owned trucking company that employs 30 independent owner-operator drivers filed a complaint in the Eastern District of Louisiana seeking to invalidate the final rule.

In Littman v. U.S. Department of Labor, two freelance writer-editors filed suit in the Middle District of Tennessee, alleging that the final rule will hinder their ability to continue working as independent contractors and will deter potential clients from hiring them.  

The bottom line: The new rule aims to skew the classification analysis toward a finding that a worker is an employee

The DOL’s final rule is a key component of the Biden Administration’s bid to narrow the independent contractor designation and increase the number of workers who are classified as employees.  This necessarily will expand the scope of the FLSA.  Nevertheless, the final rule faces multiple court challenges that may delay or even overturn the new rule’s approach to determining whether a worker is properly classified as an employee or independent contractor.

Theodore P. Stein
410-576-4229 • tstein@gfrlaw.com