The U.S. Department of Labor (DOL) recently published its latest Final Rule for determining whether a worker is an independent contractor or an employee under the Fair Labor Standards Act (FLSA). The Final Rule rescinds the DOL’s 2021 rule and returns to the more worker-friendly “economic realities” test that has been traditionally used by the courts.
Whether or not a worker is an employee is of particular importance when considering the application of the FLSA. Under the FLSA, employees are entitled to minimum wage and overtime pay. Independent contractors, however, are not. Thus, whether a worker is an independent contractor or an employee can affect an employer’s exposure to FLSA-based wage and hour claims.
When does the Final Rule go into effect?
March 11, 2024.
Why is this important?
Companies have long struggled with how to lawfully classify workers. In the past several years, the proper classification of workers as employees or contractors has faced heightened scrutiny at both the federal and state level. Meanwhile, employers have been left to consider shifting court opinions, NLRB rulings, and DOL and IRS guidance when deciding how to classify their workers.
A Very Brief Background
The FLSA does not define “independent contractor.” In 2021, during the last days of the Trump Administration, the DOL issued a rule that, to most observers, made it easier for companies to designate workers as independent contractors. Under the Biden Administration, however, the DOL delayed that rule’s implementation and, in May 2021, withdrew the 2021 rule altogether. Then, in October 2022, the DOL issued a new proposed rule.
The Final Rule
The Final Rule largely adopts and sets forth the six-factor test proposed by the DOL in its October 2022 proposed rule. This test, often referred to as the “economic realities” test, considers:
- The worker’s opportunity for profit or loss;
- Investments by the worker and potential employer;
- The degree of permanence of the relationship;
- The nature and degree of the potential employer’s control over the work;
- The extent to which the work is “integral” to the potential employer’s business; and
- The worker’s skill or initiative.
Critically, no one factor is dispositive. Instead, the DOL offers that these factors, which are not exhaustive, should be analyzed under the “totality of the circumstances” to determine the economic dependence of a worker.
The economic realities test is not new. For years, courts (and the DOL) have applied it (with varying degrees of consistency) when considering the status of workers.
So, what does the Final Rule do?
According to the DOL, the Final Rule “continues to affirm that a worker is not an independent contractor if they are, as a matter of economic reality, economically dependent on an employer for work” and “will reduce the risk that employees are misclassified as independent contractors while at the same time providing greater consistency for businesses that engage (or wish to engage) with individuals who are in business for themselves.”
The Final Rule also offers insight into how the DOL will evaluate each of the six factors. By way of example, regarding the “degree of permanence of the relationship,” the DOL suggests that this factor weighs in favor of a W-2 employment relationship if the work relationship is “indefinite in duration, continuous, or exclusive of work for other employers.” If, however, the work is “definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themselves and marketing their services to multiple entities,” the relationship leans towards being a 1099 contractor.
Likewise, when explaining the “nature and degree of control” factor, the DOL lists several facts relevant to determining control. These include, but are not limited to, whether the putative employer:
- Sets the worker’s schedule;
- Supervises the performance of work;
- Limits the worker’s ability to work for others;
- Reserves the right to supervise or discipline workers; and
- Controls economic aspects of the working relationship, including control over prices or rates for services.
The more control the putative employer has, the more likely there is an employment relationship. Whereas, the more control that is reserved for the worker, then the analysis favors independent contractor status.
What the Final Rule does not do.
The Final Rule is not a binding regulation. Rather, as the DOL notes, it only revises the agency’s interpretation of the FLSA. As such, it does not affect the analysis for determining worker classification under other federal, state, or local laws, although it is generally given significant weight by courts.
What’s next?
More legal challenges. New lawsuits challenging the Final Rule have already been filed.
What should you do?
If you have workers that are contractors, now is a good time to review/audit those relationships and any corresponding contracts to ensure you have properly classified those workers. The exposure employers could face for improper classification of its workers is very real.
If you have any questions about the Final Rule, worker classification analysis, or your contingent workforces, please contact Genevieve Bradley, Tim Feehan, or Sean Gibbons.
For more information or for a consultation, contact us using the form below or call 703-485-3535 for Tysons Corner, VA or 804-441-8440 for Richmond, VA.
