On May 6, 2021, the U.S. Department of Labor formally withdrew the final regulations promulgated earlier this year under the previous administration that set out, for the first time through administrative procedure legislation, the analysis that the Department would use to determine whether a worker was an employee or an independent contractor under the Federal Fair Labor Standards Act (FLSA).
These regulations (the “Independent Contractor Rule” or the “Final Rule”) clarified the relevant factors that the DOL would use to determine whether workers are in business for themselves and are independent contractors, or are economically dependent. of a putative employer for the work and therefore the employees. under the FLSA. The Final Rule emphasized that the proper analysis is whether a worker depends on a purported employer for their work rather than whether a worker depends on the income received.
Before adopting the final rule, the DOL and most courts considered seven factors of economic reality when analyzing an employment relationship using the economic reality test. The Independent Contractor Rule clarified the seven factors by identifying two fundamental factors based on a comprehensive analysis of decades of testing cases: (1) the nature and degree of control over the work; and (2) the possibility for the worker to realize a profit or a loss. It further sets out three additional non-exhaustive indicative factors to consider if the key factors are not determinative or point in different directions:
- The amount of specialized training or skills required for the job that the potential employer does not provide;
- The degree of permanence of the employment relationship, focusing on the continuity and duration of the relationship and weighing on the status of independent entrepreneur if the relationship is defined over time or sporadic; and
- If the work performed is “part of an integrated production unit”.
The independent contractor rule was published on January 7, 2021, with an effective date of March 8, 2021. In February 2021, shortly after the inauguration of President Joseph R. Biden, the ministry proposed to postpone the effective date of the rule, and in March issued a final rule postponing the effective date of the independent contractor rule to May 7, 2021. He then proposed to withdraw the rule in his in full, and on May 6, 2021 – one day before its deferred effective date – formally did so. Both the initial delay of the independent contractor rule and its subsequent withdrawal are currently the subject of a legal challenge in the US District Court for the Eastern District of Texas.
The withdrawal of the final rule, if upheld by the court, means employers will have less clarity on how the courts and the ministry will determine independent contractor status under the FLSA. Courts have used a variety of different tests, making predictability and consistency, especially for domestic employers, difficult.
Perhaps more worrying for employers is the hope that the Department will take a more aggressive approach to the enforcement of worker classification laws and significantly reduce the category of workers who can be properly classified as entrepreneurs. independent according to the law. US Secretary of Labor Marty Walsh has made a number of public statements indicating that the department will take a very close look at issues of misclassifying workers and suggesting that many workers – especially those in the odd-job economy – may be misclassified as independent contractors.
It is also expected that David Weil – who served as administrator in the department’s Wages and Hours Division during the Obama administration – will likely be approached by President Biden to take up the post again. Weil has repeatedly expressed his view that construction workers are misclassified and, as head of the wages and hours division in 2015, issued an interpretation of the administrator (withdrawn under administration Trump) who interpreted the definition of employee under the FLSA very broadly. If Weil is chosen to lead the agency again, it is likely that he will embrace this point of view again.
The DOL also has broad litigation power under the FLSA. Unlike private litigation, the DOL can expand a complaints and any litigation-focused investigation to include as many regions as it sees fit. More importantly, the DOL can seek a national injunction based on a limited investigation if it can show the practices are company-wide. Unlike private litigation, arbitration agreements are not valid against DOL enforcement actions and there is no requirement for class certification. It is also likely that the Department will make greater use of strategic or targeted investigations; Weil championed the targeted application of specific industries during his tenure in the Wages and Hours Division.
The Federal Court’s ruling in the pending litigation could delay or mitigate threats of DOL’s challenge to independent contracts. Nonetheless, employers should expect the Department to vigorously and vigorously enforce the wage and hour standards under the FLSA, and businesses employing independent contractors would be advised to carefully review their procedures and practices by following the FLSA. taking into account the DOL’s likely hostility to the business model.