“Employee means any individual employed by an employer.”
That’s not some sixth grader’s attempt to mask their failure to study for a vocab quiz: It’s what Congress gifted us with 85 years ago in the Fair Labor Standards Act (FLSA), which establishes the federal minimum wage and imposes overtime pay requirements. Is the FLSA’s definition of “employee” an elegant legislative masterpiece or an example of circular nonsense?
While you wrestle with that question, the federal Department of Labor (DOL) hopes to save the day with a 339-page tome on what really makes a worker an “employee” covered by the FLSA. The DOL’s most recent “Final Rule” (January 10, 2024) specifically addresses how the agency will determine whether a worker is an employee (covered) or an independent contractor (not covered) for purposes of the FLSA.
As expected, the new rule makes it more difficult for employers to classify workers as independent contractors rather than employees under the FLSA. In a press release, the DOL described the rule as intended to “combat employee misclassification” and protect workers from “exploitation.”
Fundamentally, the DOL’s new rule is just a return to an old rule. In the waning hours of President Trump’s administration, the DOL replaced the then-existing rule with one understood to make it easier for workers to be classified as independent contractors under the FLSA. President Biden’s administration predictably sought to abrogate the Trump rule, but a court ordered that the rule remain in place until Biden’s DOL jumped through all the right procedural hoops to replace it, including issuing a proposed rule for public comments (of which they received 55,400). Fast forward to today—or, rather, 60 days from today—when the new rule finally goes into effect.
The differences between the rules are nuanced on paper but may be significant in practice. All iterations focus on a multi-factor “economic realities” analysis of the relationship between the worker and the potential employer. But where the Trump rule emphasized (1) the nature and degree of control exerted over the work and (2) the worker’s opportunity for profit or loss, the latest rule takes a more nebulous “totality-of-the-circumstances” approach.
Under this approach, to determine whether a worker is “economically dependent on an employer for work” as opposed to being “in business for themself,” the DOL considers six guiding factors, none of which are individually dispositive:
- Opportunity for profit or loss depending on managerial skill;
- Investments by the worker and the potential employer;
- Degree of permanence of the work relationship;
- Nature and degree of control;
- Extent to which the work performed is an integral part of the potential employer’s business; and
- Skill and initiative.
Each of these factors is addressed and explained in the rule.
Ironically, the DOL supposedly does not expect the new rule to lead to “widespread reclassification” of workers. That’s largely because the DOL believes most folks simply ignored the Trump rule. But tell that to Senator Bill Cassidy, who said the new rule “dismantles the gig economy.”
For employers, the new rule should be a strong prompt to carefully assess worker classifications. In doing so, employers need to remember that the DOL’s framework differs from employee-vs-independent-contractor tests for other federal law purposes, such as for determining FICA withholding obligations or collective bargaining duties. In addition, many states—including Colorado—have their own independent contractor tests for purposes of state law. The DOL did not adopt—and does not believe it has authority to adopt—the stricter “ABC test” some states have implemented.
