Enacted in 1938, the FLSA requires, among other things, that employers provide minimum wage and overtime payments to non-exempt employees. The FLSA also has certain records retention requirements, and prohibits retaliation against employees for participating in certain activities or raising certain concerns with their employer. These protections, however, do not extend to independent contractors. 

 

The FLSA uses broad terms when defining who is an employer and who is an employee. Under the Act, an employer “includes any person acting directly or indirectly in the interest of an employer in relation to an employee . . . .” 29 U.S.C. 203(d). The FLSA defines employee as “any individual employed by an employer.” 29 U.S.C. 203(e)(1). Further, the term “employ includes to suffer or permit to work.” 29 U.S.C. 203(g). Moreover, the term “independent contractor” is not defined in the FLSA. The net result is that the statute itself provides little assistance to companies in determining the proper classification of a worker. 

 

Since the FLSA’s inception, however, the DOL and courts have generally applied the economic realities test to determine whether a worker is an employee or an independent contractor. Under the economic realities test, the DOL and courts have typically looked at the totality of the circumstances to determine a worker’s status. The factors considering in making this determination include the worker’s opportunity for profit or loss, the worker’s investment in the worker’s business, permanency of the relationship between the worker and company, the degree of control by the employer over the worker, whether the work being performed by the worker is an integral part of the employer’s normal business operations, and the skill needed to perform the work.

 

The DOL, under the Trump administration, issued a Final Rule defining independent contractors in January 2021, which was to become effective on March 8, 2021 (the 2021 IC Rule). The 2021 IC Rule departed from the totality-of-the-circumstances analysis and designated two “core” factors (the nature and degree of control over the work and the worker’s opportunity for profit or loss) as carrying more weight in any worker classification analysis. If those two factors favored independent contractor status, then there was a substantial likelihood that the worker was an independent contractor. The Biden Administration’s DOL swiftly delayed (on March 4, 2021) and withdrew (May 6, 2021) the 2021 IC Rule. Litigation followed, challenging the process used by the DOL to delay and withdraw the 2021 IC Rule. The Federal District Court in the Eastern District of Texas issued a decision on March 14, 2022 concluding that the 2021 IC Rule did, in fact, become effective on March 8, 2021, but what that meant has remained a bit unclear. 

 

In this NPRM, the DOL states that the 2021 IC Rule does not comport with FLSA’s text and purpose as interpreted by courts for decades. Therefore, the DOL intends to rescind the 2021 IC Rule and return to the use of totality-of-the-circumstances analysis instead of using the two core factors. The NPRM indicates that a revised rule will also:

The DOL states that the “statutory language thus frames the central question that the economic reality test asks – whether the worker is economically dependent on an employer who suffers or permits the work or whether the worker is in business for themself.” The DOL believes that “the concept of economic dependence is underdeveloped in the case law” and “is therefore proposing to continue to include its interpretation, as it did in the 2021 IC Rule, that economic dependence is the ultimate inquiry, and that the employee is someone who, as a matter of economic reality, is economically dependent on an employer for work – not for income.” Therefore, the expectation is that the revised rules will elaborate on the general meaning of economic dependence while sharpening the focus of each of the six factors’ probative value on that issue. (The DOL clarified that it is precluded from codifying the ABC test “because the Supreme Court has held that the economic realities test is the applicable standard for determining workers’ classification under the FLSA as an employee or independent contractor.”)

 

The NPRM also indicates that the DOL intends to:

In this way, the DOL intends to ensure that none of the factors of the economic realities test is determinative of itself, but all must be considered together in a totality of the circumstances. 

 

Employers should take a look at their independent contractors and consult with counsel to ensure that their workforce will comply with the NPRM’s proposed analysis. In many ways, employers will revert to their prior analyses, but be sure to pay particular attention to economic dependence factor because, although the DOL says it is not giving any particular factor more weight than the others, the economic dependence of a worker on the employer likely will be the primary focus.

 

Comments on this NPRM must be submitted within 45 days of its publication. See 2022-21454.pdf (federalregister.gov) for more information.