Seyfarth Synopsis: Today the U.S. Department of Labor issued its draft new interpretive regulation (or NPRM) attempting to define employee versus independent contractor status under the Fair Labor Standards Act. The NPRM jettisons an earlier attempt under the prior Administration to modernize and simplify how to determine who is an employee and who is a contractor. The DOL proposes instead a return to a more ambiguous totality-of-the-circumstances approach that largely amalgamates existing judicial precedent, but that also clearly aims to place a thumb on the scale in favor of more workers being deemed employees under the FLSA.
Surprisingly to many, the FLSA itself does not define what constitutes an employee versus independent contractor. Indeed, until early January 2021, the FLSA lacked even a regulatory definition of the term. Because of that, guidance dictating which workers are employees subject to the FLSA’s minimum wage, overtime, and recordkeeping requirements, and which workers may be classified as independent contractors, who are not subject to the FLSA, has come mainly through court decisions. Those court decisions predominately coalesce around some form of an “economic realities test,” in which courts balance several factors to determine if a worker is so dependent on the business to which they render services that they must be deemed an employee.
This set of multi-factor tests has been criticized on two principal grounds. First, as summarized by Judge Easterbrook of the Court of Appeals for the Seventh Circuit, the economic realities test “is unsatisfactory both because it offers little guidance for future cases and because any balancing test begs questions about which aspects of ‘economic reality’ matter and why.” Sec. of Labor v. Lauritzen, 835 F.2d 1529, 1539 (7th Cir. 1988) (Easterbrook, J. concurring). Second, these tests — which date back to 1947 — do not adequately account for the growth of the gig economy, the increased desire among workers to control their work hours to ensure a work-life balance, and the evolution of the modern workplace to one in which workers rarely retain one full-time job throughout their working years, which cumulatively have contributed to a greater demand for the flexibility that comes with and independent contractor relationships.
After issuing sub-regulatory guidance for a number of years, the DOL finally stepped in with its own interpretation in January 2021, that was scheduled to become effective in March 2021, on how to define an employee versus a contractor under the FLSA. In doing so, the DOL proposed to simplify the multi-factor test by setting forth two core factors to consider: (1) the nature and degree of the worker’s control of the work, and (2) the worker’s opportunity to earn a profit or loss. The proposal further provided that, if both factors point toward the same classification, whether employee or contractor, then the worker is very likely to be classified as such.. If, however, those factors point in opposite directions, then three other factors should be considered: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the individual and the company, and (3) whether the work is part of an integrated unit of production.
Following the change in administration, however, the DOL delayed the effective date of that rule and then withdrew it in May 2021.
The DOL’s New Interpretation
Nearly a year and a half later, the DOL has completely rescinded its prior guidance and has now set forth a new (but still kind of old) analysis for determining employee or contractor status under the FLSA.The proposed interpretation reinstates a multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the FLSA. The relevant factors under this test include:
(1) The worker’s opportunity for profit or loss depending on managerial skill. This factor considers the managerial skill exercised by a worker, skills that will affect their success or failure in performing the work. Additional considerations include whether the worker can set the rate of pay for the service provided, whether the worker accepts or declines jobs or the order in which they are completed, whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work, and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rents space, and finally, whether the worker has the opportunity to experience financial loss. The DOL’s proposal notes that “the decision to work more hours or take more jobs generally do[es] not reflect the exercise of managerial skill indicating independent contractor status.”
(2) Investments made by the worker and the employer. According to the DOL, an investment borne by the worker must be capital or entrepreneurial in nature to indicate independent contractor status. Under that standard, the DOL notes, the use of a personal vehicle or vehicle leased by a worker to perform work will generally not be indicative of independent contractor status. Concerningly, the DOL stress that “the worker’s investments should be considered on a relative basis with the employer’s investments in its overall business,” while at the same time acknowledging that the magnitude and scope of a worker’s investment will rarely be comparable to that of a putative employer.
(3) Degree of permanence of the work relationship. The DOL’s proposed interpretation states that where workers provide services under a contract that is “routinely or automatically renewed,” that indicates a permanent or indefinite relationship indicative of employee status. The NPRM also includes exclusivity as weighing against independent contractor status, while simultaneously providing that the ability to work for others does not necessarily weigh in favor of independent contractor status. The NPRM explicitly notes that exclusivity should be evaluated for both the permanence and control factors of the economic realities test. It further provides that “operational characteristics that are unique or intrinsic to particular businesses or industries and the workers they employ” that result in a lack of permanence should not weigh in favor of contractor status. Thus, the NPRM appears to be saying that the provision of sporadic services by a worker (such as seasonal or temporary work) does not make them a contractor.
(4) Nature and degree of the business’s control over the worker. Under the proposal, this factor would consider the putative employer’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship. Facts relevant to control would include whether the employer sets the worker’s schedule, supervises the performance of the work, sets the price or rate for service, or explicitly limits the worker’s ability to work for others. In a clear break with prior proposed guidance, the DOL also states that “control implemented by the employer for purposes of complying with legal obligations, safety standards, or contractual or customer service standards may be indicative of control.”
(5) Extent to which the work performed is an integral part of the employer’s business. The DOL’s framing of this factor may be particularly problematic. The DOL proposes that “this factor does not depend on whether any individual worker in particular is an integral part of the business, but rather whether the function they perform is an integral part” and that when the work a worker performs is “critical, necessary, or central to the employer’s principal business,” then this factor weighs in favor of employer status. It begs the question of how to determine an employer’s “principal business” or what is “critical, necessary, or central to it,” though the DOL’s commentary to its proposal provides some possible guidance.
(6) Whether the worker uses specialized skills in performing the work. Under the proposal, if a worker “uses specialized skills and … those skills contribute to business-like initiative,” then the worker is more likely a contractor. In its commentary, however, the DOL proposes to define those skills rather narrowly. The DOL commentary also proposes that, even when a worker actually possesses specialized skills, that fact is irrelevant unless the work actually requires those skills.
Under the proposed rule, no one factor would be dispositive or entitled to predetermined weight. While on the one hand this may lead to greater flexibility, it can also blur lines and, under some circumstances, fuel litigation.
What’s Next and What Will It Mean
The proposal is just that: a proposal, and it may change in unforeseen ways before a final interpretation is implemented. The DOL will be accepting comments from the public to assist in the rulemaking process through November 28, 2022.
And even when the proposal is finalized, it is not clear what effect it will have. Significantly, the DOL’s action, though termed a “rulemaking,” is not the promulgation of a rule in the classic sense. Unlike exempt status regulations, for example, this DOL regulation is an interpretive one that does not necessarily constitute the law and courts are not bound to follow it. Each federal circuit has its own body of judicial precedent defining employee vs. contractor, and courts will remain bound to follow that precedent. The extent to which they find the DOL’s interpretation persuasive, and thus a standard to apply, remains to be seen.
Further, remember that this is just one statute in which employment classification matters. Many states have their own minimum wage and overtime laws, and several of those laws contain different definitions of who is an employee and who is a contractor. The DOL’s proposal does not affect that. It also does not affect the definition of employee vs. independent contractor under all the other federal or state employment statutes, such as the National Labor Relations Act.
While the proposal is just a proposal, it is clear that the guidance is designed to decrease the number of workers employers classify as independent contractors and increase the number of workers classified as employees. This goal is apparent simply by looking to the commentary added to the various factors to consider, almost all of which attempt to narrow the circumstances in which an employee can be considered an independent contractor under the FLSA. For example, the DOL unnecessarily notes that” “the decision to work more hours or take more jobs generally do[es] not reflect the exercise of managerial skill indicating independent contractor status.”