The Final Rule retains the “economic realities” test while focusing on two “core factors” in analyzing whether an individual is an employee or an independent contractor but given the upcoming change in administration, employers should not make any changes in reliance on the Final Rule.
Updated February 16, 2021:
On February 3, 2021, the US Department of Labor (DOL) proposed extending the effective date of the FLSA independent contractor rule, which was due to become effective on March 8, 2021. The proposed delay would extend the effective date of the rule to May 7. The DOL seeks comments on the rule, which are due by February 24. The proposed delay follows the White House instruction to federal agencies to freeze proposed and pending regulations pending review. It is likely that the independent contractor rule will ultimately be withdrawn by the Biden administration, so employers should continue to monitor developments and should not rely on the test articulated in the rule. Further, the DOL’s Wage & Hour Division has withdrawn two Opinion Letters applying the new independent contractor rule, on the basis that the rule was not effective when the opinions were published.
The US Department of Labor (DOL) published a Final Rule on January 7 clarifying the standard for determining when a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). As in the Proposed Rule published on September 25, 2020, the Final Rule retains the longstanding “economic realities” test but identifies two “core factors” that are most probative in determining whether a worker is properly classified as an employee or independent contractor. Although the Final Rule is scheduled to take effect on March 8, 2021, it is unlikely to survive under the incoming Biden administration.
The FLSA’s minimum wage and overtime provisions apply only to employees. These provisions do not apply to workers who qualify as independent contractors. In issuing the Final Rule, the DOL announced that it is revising the FLSA regulations in an attempt to help guide employers in deciding whether workers should be classified as employees or independent contractors under the FLSA. The Final Rule reaffirms the DOL’s current position that an “economic realities” test should be applied to determine whether an individual is in business for themselves (an independent contractor) or is economically dependent on a potential employer for work (an employee). The Final Rule, however, modifies the economic realities test the DOL previously endorsed and identifies five factors, including two “core factors”—the nature and degree of control over the work and the worker’s opportunity for profit or loss based on initiative and/or investment—that should be used to determine whether a worker qualifies as an independent contractor for purposes of the FLSA.
The Final Rule identifies five non-exhaustive factors to guide the analysis of whether a worker is an employee or independent contractor. Among these five factors, two “core factors” are afforded the greatest weight:
These two “core factors” are complemented by three additional factors that the DOL considers less probative and should be utilized when the initial two core factors lead to inconsistent results:
The Final Rule emphasizes that, in conducting the inquiry, the actual practice of the worker and employer is more relevant than what may be contractually or theoretically possible and includes six fact-specific examples applying the different factors.
The Final Rule applies only to the FLSA. Therefore, it will have no impact on any state wage and hour laws that have not adopted the FLSA for determining whether a worker should be classified as an employee or independent contractor. For example, California, with some exceptions, generally applies the “ABC test,” where a worker is considered an employee and not an independent contractor unless the hiring entity satisfies three conditions distinct from the factors identified in the Final Rule. Accordingly, regardless of DOL’s guidance on who qualifies as an independent contractor, employers should always review whether and how different state laws may apply to their workforce.
The Final Rule is scheduled to take effect on March 8, 2021, 60 days after publication in the Federal Register. As a practical matter, however, a DOL led by appointees of the incoming Biden administration is unlikely to allow the Final Rule to go into effect. First, the Biden team has indicated that it will issue a memo on Inauguration Day seeking to halt or delay regulations issued in the waning days of the Trump administration that have not yet taken effect. To implement the Executive Order, a Biden DOL would, first, likely delay the effective date to review the rule, and then rescind the Final Rule. Second, with the Democratic Party taking control of the US Senate, it is possible that the Final Rule could be overridden under the Congressional Review Act. In other words, employers should wait and see what steps a Biden DOL might take to unwind the Final Rule and whether it will issue different guidance before making any changes to their business arrangements.
Given that the Final Rule is unlikely to go into effect, employers should not rely on the revised economic realities test set forth in the Final Rule in determining whether to classify a worker as an independent contractor or employee. Nonetheless, we believe the issue of whether a worker qualifies as an independent contractor will remain the subject of frequent litigation under the FLSA and applicable state wage and hour laws. Employers should therefore continue to review how their workers are classified and rely on past precedent in helping make classification decision. Please contact the Morgan Lewis lawyers listed below if you would like guidance on best practices when making classification decisions.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Anne Marie Estevez
Michael J. Puma
Christopher K. Ramsey
Russell R. Bruch