The U.S. Department of Labor has recently unveiled proposed revisions to Wage and Hour Division regulations regarding employee and independent contractor classification under the Fair Labor Standards Act (FLSA). The stated intention of this change is to be more consistent with judicial precedent and practical implementation.
The proposed change was announced on October 13, 2022 and the period for public comment ends on November 28, 2022. With less than two weeks left for comment, employers should understand the effect of the proposed changes.
The FLSA generally requires employers covered by the statute to pay nonexempt employees at least the Federal minimum wage for all hours worked and at least 1.5 times the employee’s regular rate of pay for every hour worked over 40 hours in a workweek. However, these minimum wage and overtime pay protections do not apply to independent contractors.
The FLSA does not contain a definition of an “independent contractor”. “Employer” is defined to include “any person acting directly or indirectly in the interest of an employer in relation to an employee,” and “employee” is defined as “any individual employed by an employer.” “Employ” is defined to include “to suffer or permit to work.” The generality of these definitions requires interpretation in distinguishing the working relationships subject to or excluded from the FLSA’s application.
Since the FLSA’s inception, the Department of Labor, and courts in the United States, have applied an “economic reality test” to determine whether a worker is an employee or an independent contractor. Specific factors used in this test vary, but they generally include:
- the worker’s opportunity for profit or loss;
- the worker’s investment in equipment, materials or helpers required for their task;
- the permanence of the working relationship;
- the degree of control by the employer over the worker;
- whether the work is an integral part of the employer’s business; and
- the skill and initiative required of the worker in performing the work.
The Supreme Court of the United States affirmed the “economic reality test” under the FLSA in 1961[1] and again in 1992[2].
In 2021 the Department of Labor instituted a rule (the 2021 Rule) which identified five economic reality factors but focused narrowly on two of those factors – the nature and degree of control over the work and the worker’s opportunity for profit or loss. The 2021 Rule stated that it was not likely for the three non-core factors to outweigh the probative value of the two core factors.
However, the Department of Labor now believes that the 2021 Rule does not fully reflect the FLSA’s purpose as interpreted by the courts and the decades of case law on economic reality tests. Moreover, the Department of Labor believes that elevation of certain factors in the 2021 Rule could have led to an increase in the risk of misclassification of employees as independent contractors. Since the 2021 Rule departed from precedent, mainly in its designation of two factors as most probative, the Department of Labor proposes a new analysis.
The new proposal would establish a non-exhaustive six-step economic realities test, with no “core factors”, for distinguishing between employees and independent contractors. The rule would focus on a “totality-of-the-circumstances” analysis, in keeping with the analysis applied by federal courts throughout the existence of the FLSA.
The potential effect of this rule is to cast a wider net in the FLSA’s application to working relationships, classifying more workers as employees and entitling them to the minimum wage amounts guaranteed by federal legislation. For the uninformed employer, this could lead to increased litigation, including potential class action lawsuits.
Employers therefore should take a fresh look at their existing classification practices, notably if they previously revised them to conform to the 2021 Rule. In cases of doubt, seeking the advice of legal counsel knowledgeable in this area is recommended. We will continue to monitor and report on developments, notably once the comment period is over and the final rule is published.
1 Goldberg v. Whitaker House Co-op., Inc., 366 U.S. 28, 32-33 (1961).
2 Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992).
