The U.S. Department of Labor (DOL) announced a final rule last week revising its guidance to employers and workers to help determine if a worker qualifies as an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The new rule, which was published in the Federal Register on Wednesday and takes effect March 11, rescinds the DOL’s previous Independent Contractor Rule that was published three years ago.
The final rule’s analysis for determining employee or independent contractor status is now more consistent with the FLSA as interpreted by longstanding judicial precedent. The rule provides guidance for employers on how to properly classify employees and independent contractors to combat employee misclassification.
Misclassification of employees as independent contractors has been identified as a serious problem for affected employers and workers in the U.S. It “impacts workers’ rights to minimum wage and overtime pay, facilitates wage theft, allows some employers to undercut their law-abiding competition and hurts the economy at-large,” according to the DOL. A worker is entitled to minimum wage and overtime pay protections under the FLSA when there is an employment relationship between the worker and an employer, and both parties are covered by the FLSA. On the other hand, the FLSA’s minimum wage and overtime protections do not apply to true independent contractors.
As a result, employees misclassified as independent contractors may be improperly denied minimum wage, overtime pay and other protections, resulting in less pay and/or benefits. In addition, employers who comply with the law are at a competitive disadvantage against employers who misclassify employees as independent contractors and pay them less than the law requires or fail to provide them with other employee protections, resulting in cost-savings for the employer.
The new rule – when properly followed – will provide a consistent approach for classifying workers and help employers comply with the law, thus reducing the risk of employee misclassification. It restores the multifactor analysis used by courts for decades to determine worker classification. Specifically, the rule establishes a six-factor test, known as the “economic realities test,” which guides the analysis of a worker’s relationship with an employer. Some of the major factors considered in this analysis include, but are not limited to:
- any opportunity for profit or loss a worker might have
- the financial stake and nature of any resources a worker has invested in the work
- the degree of permanence of the work relationship
- the degree of control an employer has over the person’s work
- whether the work the person does is essential to the employer’s business
- a factor regarding the worker’s skill and initiative.
Importantly, the rule notes that the list of relevant factors to determine employee or independent contractor status are non-exhaustive.
The rule also rescinds an independent contractor rule previously issued – although never enacted – under former President Donald Trump that focused more narrowly on two factors of the economic realities test: the principal’s right to control the manner and means by which the work is performed; and the worker’s opportunity for profit or loss.
The new rule may face court challenges like similar past rules have faced. In fact, a lawsuit is still pending in the 5th U.S. Circuit Court of Appeals regarding the attempted withdrawal of the independent contractor rule issued during the Trump administration. In the meantime, employers should carefully review the final rule and evaluate their current workforce and any existing classification procedures and practices, to ensure their current methods and classifications are compliant. Employers are encouraged to consult counsel regarding compliance with the FLSA and other applicable laws.
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