On January 7, 2021, the Department of Labor (“DOL”) issued its final rule on “Employee or Independent Contractor Classification” which will be published in the Federal Register, with an effective date of March 8, 2021. The Notice of Proposed Rulemaking and Request for Comments (“NPRM”) was first announced in September 2020 regarding joint employer status under the Fair Labor Standards Act (“FLSA”). The final rule, as discussed below, largely adheres to the earliest Supreme Court decisions and the DOL’s previously established guidance, by continuing to focus on whether the worker is in business for himself or is instead dependent upon the company for work. The DOL’s new rule now offers the previously missing guidance on how much weight should be given to the enumerated factors used to assess a worker’s economic-independence or dependence. The final rule is viewed as beneficial to employers, especially employers that utilize gig workers. However, it should be noted that it remains to be seen whether the Biden administration will permit the final rule to take effect.
What does the DOL’s final rule provide?
The DOL’s final rule determines whether a worker should be classified as an employee or independent contractor under the FLSA. Importantly, the FLSA and its minimum wage and overtime requirements do not apply to workers characterized as independent contractors. The DOL’s new rule now clearly sets forth the two driving factors under the economic reality test, in addition to other factors discussed below, to determine whether a worker is an independent contractor or an employee. These two core factors are: (1) the degree and nature of the worker’s control over the work performed; and (2) the worker’s opportunity to incur loss or earn profits based on the worker’s exercise of initiative or the management of investments in or expenses for items such as equipment, helpers, or material to further the work.
The first core factor will weigh in favor of the individual as an independent contractor when the individual is exercising extensive control over the key aspects of their work performance. For example, this may include setting their schedule, selecting their projects, and/or having the ability to work for other entities, including working for the potential employer’s competitors. However, this first core factor will weigh in favor of the individual being an employee under the FLSA to the extent that the employer exercises extensive control over the key aspects of the individual’s work. For example, an individual will likely be classified as an employee if the individual’s workload or schedule is controlled by the employer directly or indirectly and requires the individual to work exclusively for that employer. The DOL’s rule provides that certain issues some courts have previously afforded weight to, such as requiring compliance with health and safety standards, contractual deadlines, laws and regulations, and quality control standards, should not be taken into account when analyzing this factor.
With respect to the second core factor, the analysis is focused on the individual’s opportunity for loss or profit. The individual will likely be deemed an independent contractor when the individual has the opportunity to incur losses or earn profits based on their own exercise of initiative or management of their personal investment in or capital expenditure on equipment, materials or helpers to further their work. The DOL noted that it makes sense in this modern economy for the individual to satisfy this factor through initiative without also needing to demonstrate investment, or vice versa, because many contractors are in knowledge-based positions that require little investment in equipment or materials. This factor will weigh toward an individual being deemed an employee to the extent that the individual is unable to affect their earnings or is only able to increase their earnings by working more hours or faster.
The DOL further explains that if these two core factors clearly point toward either the individual being deemed an employee or independent contractor, then it is likely that it will yield the correct classification. However, if these core factors do not lead to the same determination of the individual’s status, then the analysis should turn towards the remaining factors discussed below.
The DOL’s final rule also enumerates certain other factors that can be considered in order to determine an individual’s status as an independent contractor or employee if the core factors do not lead to the same conclusion regarding the individual’s status. Those factors include:
· The amount of skill required to perform the work. This factor will weigh in favor of the individual being an independent contractor to the extent that the individual’s work requires specialized skills or training that the individual has acquired on their own and that the potential employer does not provide.
· Whether the work is part of an integrated unit of production. This factor weighs in favor of the individual being deemed an employee if the work performed cannot be segregated from the potential employer’s production process.
· The degree of permanence of the working relationship between the individual and potential employer. This factor weighs in favor of the individual being an employee if the working relationship is found to be long-lasting and more permanent.
Importantly, it should be noted that the rule places a heavy focus for all five factors based on the actual circumstances of the working relationship between the individual and potential employer, rather than what is merely theoretically or contractually possible in the relationship.
But will it last?
The DOL’s final rule is scheduled to take effect on March 8, 2021, but it remains to be seen how or if the new Biden administration will embrace the new rule. The Biden administration can reject the rule under the Congressional Review Act, particularly because the Senate majority has changed, or the Biden administration could freeze the new rule or start its own rule-making process. Additionally, if the rule were to go into effect it is likely that certain state attorneys general might seek an injunction against the rule.
Nonetheless, the DOL’s final rule provides the much-needed guidance for workers and employers alike, particularly because our modern economy requires a need for uniformity and clarity in the economic realities test. However, businesses and workers should note that they are well-advised to treat the DOL’s new rule precisely as guidance and not set in stone until the Biden administration determines what it will do with the new rule.