Employment Law Report
Final Rule Clarifying Independent Contractor Classification Published Today, Effective March 8, 2021
Today the Department of Labor (“DOL”) published its Final Rule regarding Independent Contractor Status under the Fair Labor Standards Act (“FLSA”). See the press release here. The Independent Contractor test for the FLSA remained largely unchanged until five or six years ago, when the DOL revised the test making it “virtually impossible” to be an independent contractor. If a company incorrectly classifies an individual as an independent contractor, then it could be liable for back taxes and unpaid overtime or minimum wage, among other potential liabilities. Within the last several years, the DOL indicated that it would be clarifying the test regarding independent contractors. The Final Rule published today makes it easier for companies to classify individuals as independent contractors. However, the DOL notes that it is a very fact specific inquiry.
The key parts of the Final Rule are:
- Utilizes an “economic reality” test to determine whether an individual is an independent contractor or an employee.
- States that there are two “core factors” that are the most probative to the question of whether a worker is economically dependent on someone else’s business (and, thus, is an employee instead of an Independent Contractor):
- The nature and degree of control over the work.
- The worker’s opportunity for profit or loss based on initiative and/or investment.
- States that there are three other factors that may be helpful for the analysis, particularly when the two “core factors” do not point to the same classification. The additional factors are:
- The amount of skill required for the work.
- The degree of permanence of the working relationship between the worker and the potential employer.
- Whether the work is part of an integrated unit of production.
- The actual practice of the worker and the potential employer may be more relevant than what is stated in the contract.
The Final Rule also has several examples utilizing these factors, which are copied below:
First Example. An individual is the owner and operator of a tractor-trailer and performs transportation services for a logistics company. The owner-operator substantially controls the key aspects of the work. However, the logistics company has installed, at its own expense, a device that limits the maximum speed of the owner-operator’s vehicle and monitors the speed through GPS. The company limits the owner-operator’s speed in order to comply with federally mandated motor carrier safety regulations and to ensure that the owner-operator complies with local traffic laws. The company also requires the owner-operator to meet certain contractually agreed-upon delivery deadlines, and the owner-operator’s contract includes agreed-upon incentives for meeting, and penalties for missing, the deadlines.
Application. The owner-operator exercises substantial control over key aspects of her work, indicating independent contractor status. The fact that the company has installed a device that limits and monitors the speed of the owner-operator’s vehicle does not change the above conclusion. This measure is implemented in order to comply with specific legal obligations and to ensure safety, and thus under § 795.105(d)(1)(i) would not constitute control that makes the owner-operator more or less likely to be an employee under the Act. The contractually agreed upon delivery deadlines, incentives, and penalties are typical of contractual relationships between businesses and likewise would not constitute control that makes the owner-operator more or less likely to be an employee under the Act.
Second Example. An individual accepts assignments from a company that provides an app-based service linking those who need home-repair work with those who perform home-repair work. The individual is able to meaningfully increase his earnings by exercising initiative and business acumen and by investing in his own equipment. The company, however, has invested millions of dollars in developing and maintaining the app, marketing itself, maintaining the security of information submitted by actual and prospective customers and workers, and monitoring customer satisfaction with the work performed.
Application. The opportunity for profit or loss factor favors independent contractor status for the individual, despite the substantial difference in the monetary value of the investments made by each party. While the company may have invested substantially more in its business, the value of that investment is not relevant in determining whether the individual has a meaningful opportunity for profit or loss through his initiative, investment, or both.
Third Example. An individual worker works full time performing home renovation and repair services for a residential construction company. She is also the part owner of a food truck, which she operates on weekends. In performing the construction work, the worker is paid a fixed hourly rate, and the company determines how many and which tasks she performs. Her food truck recently became very popular and has generated substantial profits for her.
Application. With regard to the construction work, the worker does not have a meaningful opportunity for profit or loss based on her exercise of initiative or investment, indicating employee status. She is unable to profit, i.e., increase her earnings, by exercising initiative or managing investments because she is paid a fixed hourly rate and the company determines the assignment of work. While she earns substantial profits through her food truck, that is a separate business from her work in the construction industry, and therefore is not relevant to the question of whether she is an employee of the construction company or in business for herself in the construction industry.
Fourth Example. A housekeeper works for a ski resort every winter. At the end of each winter, he stops working for the ski resort because the resort shuts down. At the beginning of each of the past several winters, the housekeeper returned to his prior position at the ski resort without formally applying or interviewing.
Application. The housekeeper has a long-term and indefinite work relationship with the ski resort under the permanence factor, which weighs in favor of classification as an employee. That his periods of working for the ski resort end at the end of each winter is a result of the seasonal nature of the ski industry and is thus not indicative of a sporadic relationship. The fact that the housekeeper returns to his prior position each new season indicates that his relationship with the ski resort does not end and is indefinite as a matter of economic reality.
Fifth Example. An editor works part-time for a newspaper. The editor works from home and is responsible for assigning and reviewing many articles published by the newspaper. Sometimes she also writes or rewrites articles. The editor is responsible for determining the layout and order in which all articles appear in the newspaper’s print and online editions. She makes assignment and lay-out decisions in coordination with several full-time editors who make similar decisions with respect to different articles in the same publication, and who are employees of the newspaper.
Application. The editor is part of an integrated unit of production of the newspaper because she is involved in the entire production process of the newspaper, including assigning, reviewing, drafting, and laying out articles. This factor points in the direction of her being an employee of the newspaper. This conclusion is further supported by the fact that the editor performs the same work as employees of the newspaper in coordination with those employees. The fact that she does not physically work at the newspaper’s office does not outweigh these more probative considerations of the integrated unit factor.
Sixth Example. A journalist writes articles for a newspaper on a freelance basis. The journalist does not have an office and generally works from home. He submits an article to the newspaper once every 2 to 3 weeks, which the newspaper may accept or reject. The journalist sometimes corresponds with the newspaper’s editor regarding what to write about or regarding revisions to the articles that he submits, but he does not otherwise communicate or work with any of the newspaper’s employees. The journalist never assigns articles to others nor does he review or revise articles that others submit. He is not responsible for determining where his article or any other articles appear in the newspaper’s print and online editions.
Application. The journalist is not part of an integrated unit of production of the newspaper, indicating independent contractor status. His work is limited to the specific articles that he submits and is completely segregated from other parts of the newspaper’s processes that serve its specific, unified purpose of producing newspapers. It is not relevant in analyzing this factor that the writing of articles is an important part of producing newspapers. Likewise, the fact that he works at home does not strongly indicate either status, because the nature of the journalist’s work is such that the physical location where it is performed is largely irrelevant.
Although the Final Rule makes it easier for companies to classify workers as Independent Contractors, due to the potential for liability if there is misclassification, companies should seek individualized legal advice on this issue before changing classifying individuals as Independent Contractors.
