On May 5, 2021, the United States Department of Labor (DOL) released a final rule repealing a 2020 rule promulgated by the Trump administration that made it easier to classify workers as independent contractors rather than employees for Fair Labor purposes. . Standards Act (“FLSA”). As a result, the DOL will revert to assessing independent contractor status under federal law using some form of “economic realities” test – a more stringent test that the DOL has announced it will apply in all cases where the DOL examines the problems of classification of workers.
The distinction between classifying a worker as an “employee” rather than an “independent contractor” under the FLSA is important to employers. The FLSA entitles “employees” to certain protections, such as minimum wage and overtime, while “independent contractors” do not enjoy such protections. The problems of classifying workers have become more important with the continued rise of the “gig economy” and have been the subject of various interpretations depending on the administration in power.
The economic realities test goes back to a 2008 information sheet. In this test, a worker’s status is determined by examining seven factors, with no controlling factor:
- The extent to which the services rendered are an integral part of the principal’s business.
- The permanence of the relationship.
- The amount of the alleged contractor’s investment in plant and equipment.
- The nature and degree of control exercised by the principal.
- Opportunities for profit and loss of the alleged entrepreneur.
- The degree of initiative, judgment or forethought in free market competition with others required for the success of the self-employed entrepreneur claimed.
- The degree of independent organization and operation of the enterprise.
The economic realities test, however, was widely viewed as a demanding standard for companies to meet. As a result, in September 2020, as we wrote about here, the Trump DOL proposed a new, more employer-friendly standard that would allow more workers to be classified as independent contractors under the FLSA. The Biden administration’s decision to drop this widely anticipated rule proposal brings the DOL back to a stricter approach. This decision increases the likelihood that the DOL will consider a particular worker to be an employee for FLSA purposes.
It remains to be seen whether the DOL will issue further guidance or rules regarding the implementation of the economic realities test. Another point to watch is whether the DOL seeks to prioritize enforcement measures against the odd-job economy and other employers who currently operate on an independent entrepreneur model. Employers will want to keep a close eye on these developments and should remain aware that various state laws, such as those in Massachusetts and California, set stricter standards for the classification of independent contractors than the DOL.