Department of Labor Re-Adopts the Economic Reality Test for Worker Classifications under the Fair Labor Standards Act
Ashley Graves, Associate
On January 10, 2024, the U.S. Department of Labor (“DOL”) published its final rule setting new guidelines for classifying workers as either “employees” or “independent contractors” under the Fair Labor Standards Act (“FLSA” or the “Act”).[1] The new rule is a marked departure from its prior 2021 Independent Contractor Rule (“IC Rule”).
Final Changes to the New DOL Worker Classification Rules
The rules and standards applied by the DOL to classify workers as either employees or independent contractors has been a moving target in recent years, which has caused no shortage of headaches for employers attempting to distinguish between the two for purposes of compliance under the FLSA.
Now, the DOL is replacing its prior 2021 IC Rule with “an analysis that is more consistent with judicial precedent and the Act’s text and purpose.” Specifically, now the “ultimate inquiry” is whether the worker is economically dependent on the employer for work, or is truly self-employed.
This final rule is largely unchanged from the rule originally proposed in October, 2022, which was previously discussed in The Rocky Mountain Employer.[2] However, the final rule differs from the proposed rule in certain important ways:
· Control Factor: The proposed rule suggested that an employer’s requirement that a worker comply with legal obligations or requirements (such as health or safety regulations or quality control standards) could be evidence that an employer is exerting the requisite degree of control over its workers to find employment status. The DOL has since reversed its position and explained that an employer’s compliance with legal obligations or requirements does not necessarily indicate that its workers are employees, since these compliance obligations typically derive from government regulations, rather than any employer/worker relationship. However, the DOL adds that employer actions going beyond compliance with laws and regulations, that instead serve the employer’s own interest, may then indicate that an employer is exercising control sufficient for a finding that its workers are, in fact, employees.[3]
· Investment Factor: Under the proposed rule, the DOL focused its inquiry on quantitative measures of the employer’s and worker’s financial investment into the work at issue. The final rule shifts the investment focus to the types of investments being made by the employer and worker, without considering the employer’s size. The DOL explains that a worker who makes similar types of investments as the employer (parts, equipment, materials, etc.), or who makes investments that “allow the worker to operate independently in the worker’s industry or field,” is likely an independent contractor.
· Skill Factor: The proposed rule maintained that when workers use their own specialized skills to perform work (instead of relying on employer training to learn the work and perform it), such a finding is indicative of independent contractor status. However, the final rule acknowledges that both independent contractors and employees may use specialized skills and, therefore, the inquiry should turn on whether the worker uses their specialized skills “in connection with business-like initiative” to grow the worker’s own enterprise.
· Tools and Equipment: The proposed rule stated that workers who pay for tools and equipment needed for the job are not necessarily independent contractors. The final rule goes further to distinguish between out-of-pocket costs for tools and equipment that are unilaterally imposed by the employer as part of the job, versus expenditures on tools and equipment that are more entrepreneurial in nature. The former is indicative of an employer/employee relationship, while the latter weighs in favor of independent contractor status.
The final rule also reiterates that the economic reality test is based on the totality of the circumstances, and rejects granting weight to some factors over others. The 2021 IC Rule, in contrast, placed particular emphasis on the importance of a worker’s control over the opportunity for profit or loss and the worker’s actual control over the work. Now, these two factors are not necessarily more probative than the other four.[4]
Employer Considerations
The DOL’s return to the economic reality test is intended to be consistent with “the Act’s broad understanding of employment.” As such, the test is more favorable to findings of employment status than the previous 2021 IC Rule. As always, the consequences of misclassifying employees as independent contractors can be severe; including, but not limited to, liability for unpaid wages and overtime (plus penalties), federal or state tax violations, collective action lawsuits, administrative fines and penalties (especially for willful violations), and even potential criminal liability. Campbell Litigation remains ready to assist employers in navigating worker classifications under the DOL’s reinstated rule.
[1]https://www.federalregister.gov/public-inspection/2024-00067/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act; https://public-inspection.federalregister.gov/2024-00067.pdf
[2]https://www.rockymountainemployersblog.com/blog/2022/10/13/us-department-of-labor-proposes-rule-revising-the-guidance-for-classifying-workers-as-employees-or-independent-contractors-under-the-federal-labor-standards-act; https://www.federalregister.gov/documents/2022/10/13/2022-21454/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act
[3]For example, an employer requiring a worker to do more than the specific licensure requirements to comply with an employer’s higher standards.
[4]The factors that must be considered are (1) whether a worker controls their opportunity for profit or loss; (2) the extent of a worker’s investments; (3) the work relationship’s degree of permanence; (4) the extent of the employer’s control over the worker’s schedule; (5) the degree to which the work is integral to the employer’s business; and (6) the degree of skill and initiative of the worker.