US DOL Issues Final Rule on Independent Contractor Status Under the FLSA

With the growth of the gig economy, the increased desire of some workers to control their own work hours to ensure a work-life balance, and the evolution of the modern workplace to one in which workers rarely retain one full-time job throughout their working years, the demand by workers and companies alike for independent contractor relationships has grown. The line between employee and independent contractor status, however, has remained frustratingly unclear. In more than 80 years since the FLSA’s enactment, neither the FLSA’s text nor formal rulemaking have provided businesses or courts a broadly-applicable rule regarding where to draw that line. That is, until now. Tomorrow, the DOL’s final rule on “Employee or Independent Contractor Classification” will be published in the Federal Register, with an effective date of March 8, 2021.  An unofficial, advance copy of the final rule is available here.

The Notice of Proposed Rulemaking and Request for Comments (“NPRM”) was announced in September 2020, and we summarized it here. The final rule largely adheres to the rule proposed by the NPRM. In the final rule, the DOL has attempted to harmonize decades of its own employer- and industry-specific opinion letters and court decisions that have considered slightly different factors and interpreted similar factors in different manners. It has done so by articulating five non-overlapping factors to be considered in the determination of whether an individual qualifies as an employee or an independent contractor under the FLSA.

Be forewarned that it remains to be seen whether president-elect Joe Biden’s administration will permit the final rule to take effect, whether it could be rejected under the Congressional Review Act, particularly if the Senate majority changes, and whether certain state attorneys general might seek an injunction against the rule the way they did with respect to the DOL’s recent interpretation of the joint employer standard under the FLSA. Further, the independent contractor standard under other federal laws and some state laws also need to be considered for compliance. Nonetheless, the DOL’s new rule provides clearer guidance for companies on independent contractor classification under the FLSA.

What Does the DOL’s Final Rule Provide?

The DOL’s final rule adheres to the earliest Supreme Court decisions and long-standing DOL guidance by continuing to focus the inquiry on whether, as a matter of economic reality, the worker is dependent upon the company for work or is instead in business for him- or herself. The new rule, however, offers previously missing guidance on what factors should be used to assess a worker’s economic-dependence or independence and how much weight should be given to each factor. And while the rule falls short of providing absolute clarity—indeed, it expressly declines to set forth an exhaustive list of considerations—it provides a balanced approach to analyzing independent contractor status under the economic realities test, and sets forth five factors, with two of the factors being “core factors” on which greater weight should be placed.

These two core factors are (1) the nature and degree of the worker’s versus the potential employer’s control over the work; and (2) the worker’s opportunity to earn profits or incur loss based on either the worker’s exercise of initiative or the management of investments in or expenses for items such as helpers, equipment, or material to further the work.

With respect to the first core factor, examples of a worker’s control include setting one’s own schedule, selecting one’s own projects, and having the ability to work for other entities. More critically, the rule provides that a number of issues some courts have previously afforded weight—such as requiring compliance with laws and regulations, health and safety standards, contractual deadlines, and quality control standards—should not impact the analysis. On the other hand, a company’s vigilant enforcement of a non-compete clause or its punishment of a worker for turning down available work may demonstrate control by the company over the worker that is indicative of an employment relationship.

With respect to the second core factor, the worker need not have an opportunity for profit or loss based on both initiative and management of investments or expenses. The ability for a contractor to satisfy this factor through initiative without also needing to show investment, or vice versa, was a point of dissatisfaction for some commenters but, as the DOL noted, makes sense in the modern economy in which many contractors are in knowledge-based jobs that require little investment in materials or equipment. In addition, the DOL states in its preamble to the final rule that it agrees with comments submitted by Seyfarth Shaw that the worker’s use of initiative to impact profit or loss is intended to cover acumen that can be present in a wide variety of contractor jobs, such as acumen in sales, management, customer service, marketing, distribution, communications, and other learned and technical skills, and can exist independent of the skill set needed to perform the work, as in the case of the exercise of general business acumen that impacts a contractor’s ability to profitably run their own business.

If these two core factors point clearly toward either independent contractor or employee classification, they are substantially likely to yield the correct classification. If, however, these core factors do not point toward the same classification or if the considerations under one or both core factors point to different classifications or cause the factors overall to be in equipoise, then the three remaining factors gain importance in determining the correct classification.

The three remaining factors are (1) the amount of skill required for the work, (2) the degree of permanence of the working relationship between the worker and the company, and (3) whether the work is part of an integrated unit of production.

Significantly, the rule places the focus for all five factors primarily on the actual circumstances of the working relationship rather than what is merely contractually or theoretically possible in the relationship. And notably, with respect to the last factor, the rule declines to place import on whether an individual’s work is “integral” to the potential employer’s business, focusing instead on whether the individual’s work can be segregated from the potential employer’s production process.

What Happens Next?

The DOL’s final rule provides much-needed guidance for businesses and workers alike, particularly as technological, social, and business developments have highlighted a need for clarity and uniformity in the economic realities test. However, for now, businesses are well-advised to treat the new rule as precisely that: guidance.

While the final rule is slated to go into effect on March 8, 2021, it remains to be seen how the new administration will deal with the rule. Nevertheless, the rule provides necessary guidance that can be used to assist companies in understanding the impact of various modern workplace and business practices for independent workers and the businesses with which they contract.  A question remains as to the impact of the balanced approach provided by the DOL with respect to interpretation of various relevant factors that are present in the economic realities test under the FLSA and are also relevant to determination under other federal and state tests used for determining independent contractor status. The DOL has noted specifically in the rule that the various versions of the ABC test used in certain state laws have defined employment more broadly for certain purposes.

If you would like to discuss the impact of the DOL’s final rule, or the various state laws that are unaffected by the rule, please feel free to contact the authors or your typical Seyfarth contact.