On Tuesday, we published a bulletin noting that the U.S. Department of Labor had issued proposed regulations on determining whether a worker was an “employee” or an “independent contractor” for purposes of the federal Fair Labor Standards Act. The following is the more comprehensive summary that we promised.
Also, since Tuesday, the proposed regulations have been officially published in the Federal Register.
The FLSA’s minimum wage, overtime pay, and recordkeeping requirements apply only to covered employees. Workers who are independent contractors are not covered by these provisions. Because the statute does not define “independent contractor,” the DOL and the courts have applied an “economic reality” test to determine whether a worker is an employee or an independent contractor. In United States v. Silk, the U.S. Supreme Court found in 1947 that the following factors should be considered in determining whether a worker was an “employee”:
- degree of control over the work
- opportunity for profit and loss (for the worker)
- investment in facilities (by the worker)
- permanency of the relationship (between worker and putative employer)
- required skill (of the worker)
On the day that the Supreme Court issued the Silk decision, it also ruled in Rutherford Food Corp. v. McComb that the five Silk factors should be used in determining whether certain workers in a slaughterhouse were employees or independent contractors. In addition, the Court considered whether the work was “a part of the integrated unit of production.”
Today, most courts use the Silk factors in varying forms, with several adding the sixth factor from Rutherford – whether the service rendered is an integral part of the alleged employer’s business – in determining whether a worker is an employee or an independent contractor.
The DOL has applied variations of the Silk and Rutherford factors in its subregulatory documents, which include administrator interpretations, opinion letters, and fact sheets. On January 7, 2021, in the last weeks of the Trump Administration, the DOL proposed a “clearer and more consistent standard for evaluating whether a worker is an employee or an independent contractor under the FLSA” by issuing regulations. This was the first time in the FLSA’s 83 years that the DOL had issued general regulations on this subject.
The Trump regulations identified five factors to be considered in determining a worker’s status as an employee or independent contractor. Two of the five – (1) The nature and degree of control over the work and (2) the individual's opportunity for profit or loss (including investment in facilities) – were designated as “core factors” that were to be “the most probative and carry greater weight in the analysis.”
The other three factors – permanency of the relationship, required skill, and whether the work was part of an integrated unit of production – were to be treated as less probative and “highly unlikely” to outweigh the combined probative value of the two core factors. The Trump regulations also provided examples that would apply in particular factual circumstances.
(The regulations excluded consideration of whether the work performed was central to or important to the employer’s business).
On March 4, 2021, after President Biden took office, the DOL published a rule delaying the effective date of the Trump regulations, and on May 6, 2021, the Trump regulations were withdrawn. These actions by the Biden Administration were the subject of a lawsuit filed by a number of business groups who alleged that the actions did not comply with the Administrative Procedure Act. On March 14, 2022, a federal judge in Texas agreed, and reinstated the Trump regulations, which can be found in 29 C.F.R. Sections 795.100-120.
The DOL appealed the Texas decision to the U.S. Court of Appeals for the Fifth Circuit. But in in June 2022 the DOL asked to pause the appeal, telling the court that new regulations were in the works. This brings us to Tuesday of this week, when the DOL released an unofficial copy of its proposed regulations.
This Bulletin will focus on the proposed changes to the Trump Administration regulations, which are currently in effect. The following is taken from the Preamble to the proposed regulations, or from the proposed regulations themselves, with minor edits.
Proposed changes to independent contractor regulations
- “Economic dependence” is key. The DOL proposes “to affirm that economic dependence is the ultimate inquiry for determining whether a worker is an independent contractor or an employee and makes clear that the plain langue of the statute is relevant to the analysis.” (See 87 Fed. Reg. 62233, 29 CFR §795.105(b); bold in NPRM.)
- Elimination of “core factors.” The DOL proposes to delete the section of the Trump regulations dealing with “core factors” and, indeed, the entire concept because it “is not fully aligned with the FLSA’s text as interpreted by the courts or the DOL’s longstanding analysis, as well as decades of case law describing and applying the multifactor economic reality test.” (See 87 Fed. Reg. 62227, 29 CFR §795.105(c), (d).)
- In addition to deleting the discussion of core factors in Section 795.105(d), the DOL proposes to move the discussion of the economic reality test and the individual factors under that test into 29 CFR §795.110.
- De-emphasizing “actual practice.” The Trump regulations provide that “in evaluating the individual’s economic dependence on the potential employer, the actual practice of the parties involved is more relevant than what may be contractually or theoretically possible.” The DOL proposes to replace this language with a discussion of the economic reality test and the economic reality factors. The DOL indicates that contractual provisions or other rights, even if not actually exercised, may override the practice of the parties: “[E]levating actual practice over contractual authority that the employer may have reserved for exercise in the future is overly mechanical and does not allow for appropriate weight to be given to contractual provisions in situations in which they are crucial to understanding the economic realities of a relationship.” See 87 Fed. Reg. 62258.
- Economic reality test. The proposed regulations have a new section in which the DOL sets out its economic reality test: “In order to determine economic dependence, multiple factors assessing the economic realities of the working relationship are used. These factors are tools or guides to conduct a totality-of-the-circumstances analysis. This means that the outcome of the analysis does not depend on isolated factors but rather upon the circumstances of the whole activity to answer the question of whether the worker is economically dependent on the employer for work or is in business for themself [sic]…Consistent with a totality-of-the circumstances analysis, no one factor or subset of factors is necessarily dispositive, and the weight to give each factor may depend on the facts and circumstances of the particular case.” See 87 Fed. Reg. 62234, 29 CFR §795.110(a).
- The six factors. In this new section, the DOL discusses each of the six factors that will bear on the “economic realities” of the relationship between the worker and the employer. The DOL provides “a detailed analysis about the application of each factor based on case law and the Department’s enforcement experience as a guide for employers and workers in determining whether a worker is an employee or an independent contractor.” See 87 Fed. Reg. 62237, 29 CFR §795.110(b). The DOL also proposes to eliminate the examples that were included in the Trump Administration regulations.
The following is taken verbatim from the proposed regulations, with our commentary in brackets:
- Opportunity for profit or loss depending on managerial skill.
This factor considers whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work. The following facts, among others, can be relevant: whether the worker determines or can meaningfully negotiate the charge or pay for the work provided; whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed; 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 rent space. If a worker has no opportunity for a profit or loss, then this factor suggests that the worker is an employee. Some decisions by a worker that can affect the amount of pay that a worker receives, such as the decision to work more hours or take more jobs, generally do not reflect the exercise of managerial skill indicating independent contractor status under this factor.
[See 87 Fed. Reg. 62237-40.]
- Investments by the worker and the employer.
This factor considers whether any investments by a worker are capital or entrepreneurial in nature. Costs borne by a worker to perform their job (e.g., tools and equipment to perform specific jobs and the workers’ labor) are not evidence of capital or entrepreneurial investment and indicate employee status. Investments that are capital or entrepreneurial in nature and thus indicate independent contractor status generally support an independent business and serve a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach. Additionally, the worker’s investments should be considered on a relative basis with the employer’s investments in its overall business. The worker’s investments need not be equal to the employer’s investments, but the worker’s investments should support an independent business or serve a business-like function for this factor to indicate independent contractor status.
[See 87 Fed. Reg. 62240-43. Note: This factor was not included in the Trump Administration regulations.]
- Degree of permanence of the work relationship.
This factor weighs in favor of the worker being an employee when the work relationship is indefinite in duration or continuous, which is often the case in exclusive working relationships. This factor weighs in favor of the worker being an independent contractor when the work relationship is definite in duration, nonexclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities. This may include regularly occurring fixed periods of work, although the seasonal or temporary nature of work by itself would not necessarily indicate independent contractor classification. Where a lack of permanence is due to operational characteristics that are unique or intrinsic to particular businesses or industries and the workers they employ, rather than the workers’ own independent business initiative, this factor is not indicative of independent contractor status.
[See 87 Fed. Reg. 62243-46.]
- Nature and degree of control.
This factor considers the employer’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship. Facts relevant to the employer’s control over the worker include whether the employer sets the worker’s schedule, supervises the performance of the work, or explicitly limits the worker’s ability to work for others. Additionally, facts relevant to the employer’s control over the worker include whether the employer uses technological means of supervision (such as by means of a device or electronically), reserves the right to supervise or discipline workers, or places demands on workers’ time that do not allow them to work for others or work when they choose. Whether the employer controls economic aspects of the working relationship should also be considered, including control over prices or rates for services and the marketing of the services or products provided by the worker. 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. More indicia of control by the employer favors employee status; more indicia of control by the worker favors independent contractor status.
[See 87 Fed. Reg. 62246-53. Note: The description of this factor provides additional analysis, including detailed discussions of how scheduling, supervision, price-setting, and the ability to work for others should be considered. Those discussions were not included in the Trump Administration regulations.]
- Extent to which the work performed is an integral part of the employer’s business.
This factor considers whether the work performed is an integral part of the employer’s business. 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. This factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the employer’s principal business. This factor weighs in favor of the worker being an independent contractor when the work they perform is not critical, necessary, or central to the employer’s principal business.
[See 87 Fed. Reg. 62253-54. Note: According to the NPRM, the description of this factor returns to the longstanding interpretation of the “integral” factor.]
- Skill and initiative.
This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the employer to perform the work. Where the worker brings specialized skills to the work relationship, it is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.
[See 87 Fed. Reg. 62254-57.]
- Additional factors.
Additional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA, if the factors in some way indicate whether the worker is in business for themself [sic], as opposed to being economically dependent on the employer for work.
[See 87 Fed. Reg. 62257.]
A subsequent bulletin will address other issues related to the proposed regulations, including the following:
- What was the DOL’s rationale for issuing the NPRM and for rescinding the Trump Administration regulations?
- Why did the DOL choose not to issue subregulatory guidance or leave the issue for the courts?
- Why did the DOL reject other regulatory alternatives to modifying 29 CFR Part 795 (that is, using the common law or the ABC test)?