In January 2021, the Department of Labor (“DOL”) announced a rule addressing the distinction between employees and independent contractors (“Independent Contractor Rule”) under the Fair Labor Standards Act (“FLSA”). The rule was published in the Federal Register and was initially scheduled to take effect in March 2021. After a number of revisions and resubmissions, on May 5, 2021, the DOL announced the withdrawal of the Independent Contractor Rule. This withdrawal took effect immediately upon the final rule’s publication in the Federal Register on May 6, 2021, meaning that the Independent Contractor Rule never took effect.
Background
FLSA requires covered employers to pay their nonexempt employees at least the Federal minimum wage for every hour worked and overtime pay for every hour worked over 40 in a workweek, and it mandates that employers keep certain records regarding their employees. A worker who performs services for an individual or entity as an independent contractor, however, is not that person’s employee under the Act. Thus, the FLSA does not require such person to pay an independent contractor either the minimum wage or overtime pay, nor does it require that person to keep records regarding that independent contractor.
The Act does not define the term “independent contractor,” but courts and the DOL have long interpreted the relevant standard to require an evaluation of the extent of the worker’s economic dependence on the potential employer, and have developed a multifactor test to analyze whether a worker is an employee or an independent contractor under the FLSA. The ultimate inquiry is whether, as a matter of economic reality, the worker is dependent on a particular individual, business, or organization for work (and is thus an employee) or is in business for him or herself (and is thus an independent contractor
Characteristics
Thus an employment relationship under the FLSA must be distinguished from a strictly contractual one. Such a relationship must exist for any provision of the FLSA to apply to any person engaged in work which may otherwise be subject to the Act. In the application of the FLSA an employee, as distinguished from a person who is engaged in a business of his or her own, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves. The employer-employee relationship under the FLSA is tested by “economic reality” rather than “technical concepts.” It is not determined by the common law standards relating to master and servant.
The U.S. Supreme Court has on a number of occasions indicated that there is no single rule or test for determining whether an individual is an independent contractor or an employee for purposes of the FLSA. The Court has held that it is the total activity or situation which controls. Among the factors which the Court has considered significant are:
- The extent to which the services rendered are an integral part of the principal’s business.
- The permanency of the relationship.
- The amount of the alleged contractor’s investment in facilities and equipment.
- The nature and degree of control by the principal.
- The alleged contractor’s opportunities for profit and loss.
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
- The degree of independent business organization and operation.
There are certain factors which are immaterial in determining whether there is an employment relationship. Such facts as the place where work is performed, the absence of a formal employment agreement, or whether an alleged independent contractor is licensed by State/local government are not considered to have a bearing on determinations as to whether there is an employment relationship. Additionally, the Supreme Court has held that the time or mode of pay does not control the determination of employee status.
Proposed Independent Contractor Rule
To address the issues related to the creation of an independent contractor relationship, the DOL proposed to adopt an “economic reality” test to determine a worker’s status as an FLSA employee or an independent contractor. The test considered whether a worker is in business for himself or herself (independent contractor) or is instead economically dependent on an employer for work (employee). The DOL further identified two “core factors”: (1) The nature and degree of the worker’s control over the work; and (2) the worker’s opportunity for profit or loss based on initiative, investment, or both. The DOL explained it was proposing to emphasize these factors because they are the most probative of whether workers are economically dependent on someone else’s business or are in business for themselves. The proposal identified three other factors to also be considered, though they are less probative than the core factors: (1) The amount of skill required for the work, (2) the degree of permanence of the working relationship between the individual and the potential employer, and (3) whether the work is part of an integrated unit of production. The DOL further proposed to advise that the actual practice is more probative than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.
Withdrawal
The DOL received over 1,000 comments on the proposal to withdraw the Independent Contractor Rule, and the DOL stated several reasons for the withdrawal. First, the Rule’s standard has never been used by any court or by Wage and Hour Division, and the DOL questioned whether the proposed rule was fully aligned with the FLSA’s text and purpose or case law describing and applying the economic realities test. In particular, it was noted that no court has, as a general and fixed rule, elevated a subset of certain economic realities factors above others, and there is no clear statutory basis for such a predetermined weighting of the factors. Additionally, concern was expressed that the proposed rule’s novel guidance would cause confusion or lead to inconsistent outcomes rather than provide clarity or certainty, and failed to fully consider the likely costs, transfers, and benefits that could result from the Rule, particularly for affected workers who might no longer receive the FLSA’s wage and hour protections as an independent contractor.
As a result, the withdrawal took effect immediately on May 6, 2021, and the DOL’s longstanding prior guidance addressing the distinction between employees and independent contractors under the FLSA remains in effect. See WHD’s Fact Sheet #13, “Employment Relationship Under the Fair Labor Standards Act (FLSA).”