The Department of Labor has long labored to rein in the practice by some employers of labeling workers as independent contractors instead of employees to avoid the requirements under the Fair Labor Standards Act (FLSA) to pay minimum wage and overtime. It has now issued its second rule in three years attempting to articulate a meaningful standard to guide this determination.
Defining Independent Contractors under the FLSA
Efforts to define who is an independent contractor have vexed the FLSA since its inception in 1938. The difficulty is partly due to the lack of any reference, much less a definition, in the FLSA of the term “independent contractor.” Nor does the FLSA even provide a clear definition of an “employee,” which is defined only as “any individual employed by an employer,”. The term “employ” is imprecisely defined as “includes to suffer or permit to work.”Historically, the DOL and the courts have considered this “suffer or permit” definition to require an evaluation of the extent of the worker’s economic dependence on the potential employer. They have both used a multifactor test derived from rules under the Social Security Act and the National Labor Relations Act to determine when a worker is lawfully classified as an independent contractor based on the economic relationship between the employer and the worker.
DOL’s Rule Changes
However, the use of this test has led to inconsistent interpretations. During the Trump administration, the DOL sought to clarify the standard and issued a new rule in 2021. Traditionally, none of the various factors was given more weight than the others, and all were reviewed in the context of the entirety of the circumstances and not in isolation. The 2021 rule sought to rebalance these factors by giving two of them greater weight than the others, those being: (1) the nature and degree of the worker’s control over the work and (2) the worker’s opportunity for profit or loss. Additionally, it provided that the decision should be guided by the actual practice of the parties, rather than what might be contractually or theoretically possible. Helpfully, it provided a variety of factual examples of when a worker may be found to be an employee or independent contractor.
Current Landscape
The new rule rescinds the 2021 rule and restores the premise of equally weighting the six factors identified in the rule. It also removes the upgraded relevance of actual practice in lieu of an expanded view as to what is “contractually or theoretically possible.” The six factors are not exhaustive; the DOL leaves open the potential of using other undefined factors that may “in some way indicate” whether the worker is in business for the worker’s behalf or economically dependent on the employer. The DOL provides no guidance on what those factors might be.
Key Factors in Determining Classification
The six factors identified in the DOL’s new rule are as follows:
Opportunity for profit or loss depending on managerial skill:
This factor focuses on whether the worker’s profits or losses are impacted by the worker’s own initiative or business acumen, whether the worked can meaningfully negotiate the compensation for the work provided, whether the worker can accept or decline jobs, and whether the worker operates like a business (such as by engaging in marketing activities or hiring other workers or purchasing materials and equipment.
Investment by the worker and the potential employer:
This factor looks at whether investments by the worker are capital or entrepreneurial in nature, which means that the worker is making similar types of investments (albeit not on the same scale) as the potential employer, to suggest that the worker is operating independently. Those would be costs to expand the business and secure more work as opposed to costs of tools or equipment employees may typically have to purchase to do a specific job.
Degree of permanence of the work relationship:
This factor weighs in favor of a worker being an independent contractor when the work relationships is indefinite in duration, non-exclusive, project based or sporadic due to the worker providing similar services to other parties.
Nature and degree of control:
This factor has long been viewed in determining whether a worker is an independent contractor although the weight it is given has varied over time. Facts relevant to whether a worker constitutes an employee include which party sets the worker’s schedule, supervises the performance of the work, or sets the prices or rates for services. Where the potential employer has the right to discipline the worker or restrict the worker’s ability to work for others favors a finding that the worker is an employee.
Extent to which the work performed is an integral part of the potential employer’s business:
This factor looks at whether the work performed is critical, necessary or central to the potential employer’s principal business or auxiliary to it.
Skill and initiative:
This factor reviews the skill level of the worker and may be the vaguest of the six because both employees and independent contractors can demonstrate and use specialized skills in performing the work. On a basic level, a worker who does not use specialized skills in performing work or is dependent on training from the employer is likely to be classified as an employee.
Recommendations for Employers
The standard for determining whether a worker is an employee or independent contractor has never been flawless, but it appears the DOL has taken some steps backwards by restoring the more subjective unweighted analysis and removing much of the language that attempted to guide employers in determining employment status that had been in the 2021 rule. Employers are well advised to review their current independent contractor agreements to assure compliance with the broader terms of this new DOL rule. Employers also need to assure compliance with the various state rules and regulations to determine independent contractor status which may vary from the federal rule.
For assistance in working through this nebulous analysis, please contact Maribeth Meluch (MM@kjk.com) or any of our partners in the KJK Labor and Employment Practice Group.