On January 6, 2021, the U.S. Department of Labor announced its Final Rule to provide guidance on the determination of whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The Final Rule, which largely adopts the Proposed Rule (discussed in our September E-update), is scheduled to take effect on March 8, 2021 – after the change in administration. These so-called “midnight regulations,” issued during the lame-duck period between the election and the new president’s inauguration, can be placed on hold by the incoming President before they take effect – and President-Elect Biden has already indicated that he will issue an executive order that will halt or delay all such midnight regulations.
Background. A worker who is an independent contractor is generally not protected by employment laws, and companies are not required to provide them with employment benefits (including health insurance, leave, or retirement benefits) or pay employment taxes and contributions (including workers’ compensation and unemployment insurance). The misclassification of employees as independent contractors – enabling companies to avoid these obligations – has become a particularly hot area of employment litigation in recent years.
Adding to the confusion, the standard for the determination of independent contractor varies across laws, agencies, and courts at both the federal and state level. For example, as discussed in our January 2019 E-Update, the National Labor Relations Board, which has applied different tests over the years, currently utilizes a 10-factor common-law agency test that focuses on the worker’s entrepreneurial opportunity. This test also favors a finding of independent contractor status. In contrast, the U.S. Court of Appeals for the Fourth Circuit has articulated a very restrictive standard that makes independent contractor status under the FLSA more difficult to establish, as discussed in our January 2017 E-Update. At least with regard to the FLSA, the DOL’s Final Rule is intended to bring some consistency to the analysis; however, courts are not required to follow the DOL’s interpretation of the FLSA as expressed in the Final Rule.
The Final Rule. According to the DOL, the Final Rule does the following:
- Adopts an “economic reality” test to determine a worker’s status as an FLSA employee or an independent contractor. The test considers whether a worker is in business for himself or herself (independent contractor) or is economically dependent on a potential employer for work (employee).
- Identifies and explains two “core factors” to the analysis of whether a worker is economically dependent on someone else’s business or is in business for himself or herself, specifically:
- 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.
- Identifies three other factors that may serve as additional guideposts in the analysis including:
- the amount of skill required for the work;
- the degree of permanence of the working relationship between the worker and the potential employer; and
- whether the work is part of an integrated unit of production.
- Advises that the actual practice is more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.
With regard to the factor of “control,” the DOL provides examples of when an individual exhibits substantial control over the work, such as “by setting his or her own schedule, by selecting his or her projects, and/or through the ability to work for others, which might include the potential employer’s competitors.” In contrast, a potential employer would be found to exercise control over key aspects of the work, such as “by controlling the individual’s schedule or workload and/or by directly or indirectly requiring the individual to work exclusively for the potential employer.” The DOL further clarifies that “employer” control is not found through requiring an individual “to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships).”
As to the factor of “the opportunity for profit or loss,” the DOL states that a finding of independent contractor status is more likely where “the individual has an opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen or judgment) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work.” On the other hand, this factor would be weighted towards employee status “to the extent the individual is unable to affect his or her earnings through initiative or investment or is only able to do so by working more hours or faster.”
The “amount of skill required” factor weighs in favor of independent contractor status “where the work at issue requires specialized training or skill that the potential employer does not provide.” It weighs in favor of employee status where such work “requires no specialized training or skill and/or the individual is dependent upon the potential employer to equip him or her with any skills or training necessary to perform the job.”
The “permanence of the working relationship” factor considers whether the relationship “is by design definite in duration or sporadic,” favoring independent contractor status, or “is by design indefinite in duration or continuous,” favoring employee status. The DOL notes that seasonal employment does not necessarily indicate independent contractor status.
The “integrated unit” factor favors employment status where the work “is a component of the potential employer’s integrated production process for a good or service.” Independent contractor status, on the other hand, is favored where the work is “segregable from the potential employer’s production process.” The DOL specifically notes that “This factor is different from the concept of the importance or centrality of the individual’s work to the potential employer’s business.”
The DOL also explains that where the two “core factors” identified above are aligned, they will generally drive the determination of the worker’s status, regardless of the other three factors. The other three factors will be determinative only where the two core factors point in different directions. Additionally, the DOL acknowledges that other factors may be relevant to the determination, “but only if the factors in some way indicate whether the individual is in business for him- or herself, as opposed to being economically dependent on the potential employer for work.”
The DOL further provides examples applying the economic reality factors, expressly noting that such examples are illustrative, and limited to substantially similar factual situations:
- An owner-operator of a tractor-trailer is an independent contractor for a logistics company where she exercises substantial control over key aspects of her work, although the company has installed a speed-limiting device in her truck and has contractually required her to meet certain delivery deadlines. The device is implemented to comply with certain legal obligations and to ensure safety, while the contractual provisions are typical of any contractual relationship between businesses.
- An individual accepting home-repair assignments from an app-based company is an independent contractor due to his opportunity for profit or loss, through exercising initiative and business acumen and by investing in his own equipment. The fact that the company has expended considerable monies in developing and maintaining the app “is not relevant to whether the individual has a meaningful opportunity for profit or loss through his initiative, investment, or both.”
- A full-time worker performing home renovation and repair services for a residential construction company is an employee where the company pays her a fixed hourly rate and assigns her tasks, meaning that she has no meaningful opportunity for profit or loss. The fact that she also has a food truck is irrelevant to the analysis of her status, since it is a separate business.
- A housekeeper returning to his job at a ski resort every winter without reapplying or reinterviewing has a long-term and indefinite relationship with the resort under the permanence factor, which weighs in favor of employee status.
- A part-time editor who works from home is part of an integrated unit of production of the newspaper and is thus an employee of a newspaper where she is involved in the entire production process of the newspaper, including assigning, reviewing, drafting, and laying out articles. The fact that she performs the same work as on-site employees further supports this conclusion. Her physical location does not outweigh these considerations.
- A freelance journalist who works from home and submits articles to a newspaper that can be rejected or accepted is an independent contractor, where his work is limited to his specific articles and is completely segregated from other parts of the newspaper’s processes that serve its specific, unified purpose of producing newspapers. The DOL states that the fact that the writing of articles is an important part of producing newspapers is not relevant, nor is his work location.
At this point, we are waiting to see if an incoming President Biden will issue the promised executive order halting this and other midnight regulations. We will keep you posted on any developments.