The Department of Labor has marked a milestone in U.S labor law by defining ‘independent contractor’ under the Fair Labor Standards Act (FLSA) for the first time. This legal positioning is communicated via the Department’s final rule, which supplants prior informal advice.
The latest rule, which is slated to come into effect on March 11th, diverges significantly from a Trump-era rule that attempted to redefine ‘independent contractor’. The former rule was markedly absent just as swiftly as it arrived due to a foregoing trial and was subsequently replaced by a proposed rule. The final rule denotes a move back to previous court-established precedents and DOL interpretive recommendations for gig workers, and considers whether a worker is economically tethered to their employer.
This novel rule which reintroduces the Department’s earlier totality-of-the-situation advice together with long-acknowledged judicial guidance, should minimize confusion, enhance conformity, and tackle labor abuses head-on.
It formally integrates the six-factor ‘economic realities’ test, which takes into account all relevant aspects of the relationship between a worker and their potential employer, without assigning one factor greater importance than another. These factors include: the worker’s opportunity for profit or loss, the investments made by the worker and potential employer, the nature and extent of potential employer control over the work, the permanency of the relationship, the extent that the work is integral to the potential employer’s business, and the skills or initiative of the worker.
Key takeaway points comprise steps taken for specific law and regulation compliance, which are considered evidence of control under the ‘nature and degree of control’ factor unless carried out for the ‘sole purpose of compliance’.
The 2021 rule mainly relied on the first and third factors, making it easier to classify workers as independent contractors and deny employment-related benefits and protections. The ‘integral part of the business’ factor was reinterpreted to equate ‘integral’ with work that is ‘critical or central’ to the firm’s main business. This modified emphasis analyses whether the function the worker performs is integral to the business rather than the individual worker’s importance to the organization.
While the 2021 rule focused on the concept of economic dependence, with attention to whether the worker depends on an employer for work as opposed to income received and actual control, it was viewed as more pro-business. Nevertheless, the new rule underlines the DOL’s pro-employee stance on worker classification. Workers that primarily work for a single entity, for an extended duration, performing tasks that employees also undertake, will be more likely to be considered employees, even if they can demonstrate significant investment in their business or skills.
Many service workers are expected to be reclassified as employees under these new stipulations, although there is some uncertainty surrounding gig economy workers such as delivery and transportation drivers. Noteworthy gig companies such as Lyft and Uber have stated that the new rule will not influence the classification of their workers, but this remains to be seen post the likely legal challenges expected on the rule change.
Employers have been given a 60-day window to establish if their contracted workers conform to the independent contractor or employee status as per the FLSA, thus making federal wage-and-hour law applicable. The new rule will inevitably be referred to as a persuasive, albeit not definitive, legal authority in federal courts dealing with the classification of workers.
For detailed individual analysis and related legal matters, professionals could refer to the original work by Karen O’Connor, Labor and Employment Partner at Stoel Rives with focus on complex employment issues, and Emily Atmore, an Associate at Stoel Rives and a member of the litigation and labor and employment groups.