Yesterday the U.S. Department of Labor issued a Final Rule addressing how to determine whether a worker is properly classified as an “employee” or an “independent contractor” under the Fair Labor Standards Act.
The Final Rule follows a Notice of Proposed Rulemaking issued by the DOL in October 2022. In the NPRM, the DOL proposed to rescind the rule that had been issued in the last days of the Trump Administration. The DOL received 55,400 comments on the NPRM when the comment period closed on December 15, 2022.
In the Final Rule issued yesterday, the DOL wrote that “after considering the views expressed by commenters, the Department is finalizing its proposal with some modifications.” Not surprisingly, the DOL maintained its position that the Trump Administration rule should be rescinded. In determining whether a worker is an independent contractor or an employee, the DOL will consider six factors:
- Opportunity for profit or loss depending on managerial skill
- Investments by the worker and the potential employer
- Degree of permanence of the work relationship
- Nature and degree of control
- Extent to which the work performed is an integral part of the potential employer’s business
- Skill and initiative.
Other factors may also be considered if they are relevant to the overall question of economic dependence.
The following commentary is quoted from the DOL’s Executive Summary of the Final Rule, with edits for clarity (emphasis in original):
- The Final Rule returns to a “totality-of-the-circumstances” analysis of the economic reality test in which the six factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity.
- The Final Rule returns “investment” to its “pre-Trump” place as a separate factor.
- The “integral” factor looks to whether the work performed is an integral part of a potential employer’s business rather than part of an integrated unit of production.
- The DOL expands its discussion of how scheduling, remote supervision, price setting, and the ability to work for others should be considered under the “control” factor, and it allows for consideration of reserved rights while removing the provision in the Trump rule that minimized the relevance of retained rights.
- The above changes were proposed in the NPRM, but the DOL has made adjustments based on the comments received in 2022. For example, many comments were received in response to the DOL’s proposal that a business’s exercise of “control” so that it could comply with its legal obligations would weigh in favor of finding that the worker was an “employee.” In the Final Rule, the DOL has modified the proposed language to address confusion and concern regarding potential unintended consequences.
- In response to a number of comments concerning the DOL’s proposal to consider the investment of the worker versus the investment of the potential employer, the relative investments should be compared not only in terms of dollar value or size of the investments, but also based on whether the worker is making investments that are similar in kind to those of the employer (albeit on a smaller scale). If so, that would suggest that the worker is operating independently. The DOL also says that costs that are unilaterally imposed are not indicative of a worker’s capital or entrepreneurial investment.
- 29 CFR Part 795 contains the DOL’s general interpretations for determining whether workers are employees or independent contractors under the FLSA and reiterates that economic dependence is the ultimate inquiry. In other words, to be an independent contractor the worker must be, as a matter of economic reality, in business for himself or herself. The six factors listed above should guide an assessment of the economic realities of the working relationship. However, no one factor or subset of factors is necessarily dispositive.
- The return to a totality-of-the-circumstances analysis in which the factors are not assigned a predetermined weight and each factor is given full consideration represents a change from the Trump Administration rule. However, the DOL believes that its approach is the most beneficial because it is consistent with the standard that applied before the Trump Rule was promulgated. In addition, the DOL said, the new standard is consistent with federal appellate case law, and more consistent with the text and purpose of the FLSA as interpreted by the courts.
Absent a successful legal challenge, the effective date of the Final Rule is March 11.
We will soon provide a detailed discussion of each of the six factors that make up the totality of circumstances analysis.