In a move that will impact millions of workers and businesses, on October 11, 2022, the U.S. Department of Labor’s Wage and Hour Division proposed new regulations addressing whether – for purposes of the federal Fair Labor Standards Act (FLSA) – a worker is an “employee” or an “independent contractor.” In a nutshell, the proposed regulations state that whether a worker is an employee or an independent contractor turns on the “economic realities” of their relationship. The economic reality of the relationship is, in turn, based on the totality of the circumstances, as viewed through analysis of six specific factors:
(1) The opportunity for profit or loss depending on managerial skill;
(2) The relative investments by the worker and the employer;
(3) The degree of permanence of the work relationship;
(4) The nature and degree of control;
(5) The extent to which the work performed is an integral part of the employer’s business; and
(6) The nature and degree of skill and initiative of the worker.
The proposed regulation also authorizes consideration of additional unidentified factors in determining the status of the worker. The notice of the proposed regulations can be found at: https://public-inspection.federalregister.gov/2022-21454.pdf
So how did we get here and what does it mean for businesses and employers?
- The Background
The FLSA imposes numerous requirements on employers, such as payment of at least minimum wage and an overtime premium for non-exempt employees, under what circumstances an employee is “exempt” from the minimum wage and overtime requirements, and certain record-keeping obligations. But the FLSA applies only to employees – not independent contractors. Until 2021, no regulation had attempted to distinguish between the two. When disputes arose as to whether a worker had been properly classified as an employee or independent contractor, federal courts had to develop their own analyses to answer the question. Most courts agreed that a worker’s status depended on the “economic reality” of the relationship between the worker and the business they worked for. To determine what that “reality” was, courts developed varying multi-factor tests which weighed different aspects of the relationship.
The problem was that courts sometimes evaluated different factors, and even those that claimed to be evaluating the same factors often weighed those factors differently. The result was widespread uncertainty about how to properly classify some workers. The confusion about proper classification took on new importance in recent years with the emergence of the “gig economy” where both businesses and workers eschewed the traditional employer-employee relationship in favor of less burdensome and more flexible working relationships. Additionally, the number of FLSA lawsuits against businesses – which provide for back wages, liquidated (double) damages, and attorneys’ fees – ballooned over the past decade, leading to even more urgency for clarity surrounding this important issue.
In the last days of the Trump Administration, the Department of Labor issued a proposed rule seeking to clarify the factors to be considered in determining the “economic reality” of the relationship between worker and business, and to clarify which factors carried the most weight in the analysis. As noted in our previous blog shortly after his inauguration, President Biden attempted to repeal the “Trump Rule,” but a federal court in Texas allowed it to take effect.
With the publishing of the new proposed rules, the Biden Administration is once again seeking to eliminate the Trump Rule; this time by replacing it with one it claims provides more clarity by returning to “the longstanding multifactor, totality-of-the circumstances analysis” which courts applied previously.
- The Proposed Rules Favor “Employee” Status for Many Workers
According to the preamble of the new regulations, “this proposed rulemaking is not intended to disrupt the business of independent contractors who are, as a matter of economic reality, in business for themselves.” Many commentators expressed relief at what they saw as a “modest” proposal which simply returned to the status quo ante. However, although the six factors set forth in the proposed regulations broadly track those previously used by federal courts before the Trump Rule, a close analysis of the Department’s formulation and gloss on those factors suggests a strong preference for classification of workers as employees rather than independent contractors. It is little wonder that the stock price of gig-economy companies like Uber and Lyft tumbled after the announcement and industries reliant on independent contractors as a business model cried foul. Although an exhaustive review of the proposed rules discussion of the six factors is beyond this (or any readable) blog post, a few examples will suffice to demonstrate how the Department has put its finger on the scales in favor of “employee” status for many workers.
In its discussion of the first factor – opportunity for profit or loss – the Department states that a worker’s “decision to work more hours or take more jobs, generally do not reflect the exercise of managerial skill indicating independent contractor status under this factor.” That would come as a surprise to many independent contractors. Consider the plumber or painter who works faster at one job so that he can take on another. For owner-operator truck drivers and Lyft drivers, increasing the number of hours or jobs they take is practically the only mechanism for increased profit. In this new analysis, that fact no longer weighs in favor of a finding that the worker is an independent contractor.
The “investment by the worker and employer” discussion also shows a clear slant towards employee status. Traditionally, a worker’s use of their own tools and equipment to perform a job indicated that the worker was an independent contractor. But the proposed rule states that the “costs borne by a worker to perform their job (e.g., tools and equipment to perform specific jobs and the worker’s labor) are not evidence of capital or entrepreneurial investment and indicate employee status.” Removing consideration of the workers’ ownership and use of their own tools or equipment from the analysis turns the traditional factor on its head. More pointedly, the Department’s discussion of the proposed rules makes explicit that “use of a personal vehicle the worker already owns to perform work – or that the worker leases as required by the employer to perform work – is generally not” indicative of independent contractor status. This appears directed to owner-operator truck drivers as well as Uber and Lyft drivers: without the use of their own vehicles, there is little if any “investment” of the worker toward the work; thus guaranteeing this factor will almost always weigh in favor of “employee” status.
In its formulation of the “degree of permanence in the work relationship” the Department also undercuts independent contractor relationships. Many courts found that seasonal or project-specific work indicated independent contractor status because it suggested a lack of economic dependence on the hiring business. But the new rule states that “seasonal or temporary nature of work by itself would not necessarily indicate independent contractor classification.” It further states that if the reason for temporary or sporadic work is “due to operational characteristics that are unique or intrinsic to particular businesses” – rather than the worker’s desire to work elsewhere – then the lack of permanence is not an indication of independent contractor status. Given that businesses frequently use independent contractors for fixed periods or specific projects, it is common that the relationship ends based on the business’ lack of need rather than the worker’s desire to go elsewhere. Under the new rules, this reality now will no longer suggest an independent contractor relationship.
The Department’s discussion of the worker’s “skills” is also loaded in favor of employment status. Traditionally, this factor was framed as the “amount of skill required for the work.” If a worker brought with them a particular and unique skillset for a particular job or project, this usually weighed in favor of independent contractor status. However, the new rule significantly revises this factor to require both “skill and initiative” in order to have it weigh in favor of independent contractor status. Under the new rule, even highly specialized skills must be “coupled with business-like initiative for this factor to indicate independent contractor status.” The example provided contrasts a skilled welder who works for a construction firm at a time and manner directed by the firm (suggesting employee status) with a skilled welder who “uses these skills for marketing purposes, to generate new business, and to obtain work from multiple companies” (suggesting independent contractor status). In essence, this formulation removes the focus from the actual “skill” the worker brings to the job – welding – and replaces it with the worker’s “skill” in marketing themselves to businesses. This is, again, a significant departure from the traditional analysis of the “skill” factor.
Perhaps most concerning is the new rules’ formulation of whether a worker’s job is an “integral part of the employer’s business.” The new rules state that “this factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the employer’s principal business. This factor weighs in favor of the worker being an independent contractor when the work they perform is not critical, necessary, or central to the employer’s principal business.” This has long been a head-scratching factor for businesses, and the Department provides very little explanation as to its meaning. As Circuit Judge Frank Easterbrook succinctly noted in one case discussing this factor: “Everything the employer does is ‘integral’ to its business-why else do it?” As written, the new rules suggest only the most ephemeral and unimportant tasks a worker does for a business will indicate independent contractor status.
Lastly, the proposed rule states that “additional factors” should also be considered “if the factors in some way indicate whether the worker is in business for themselves, as opposed to being economically dependent on the employer for work.” The problem with this formulation is that it largely ignores the “economic reality” of most independent contractors. Independent contractors are both “in business for themselves” and are “economically dependent” on contracts with other businesses for work. Unfortunately, the lack of clarity in the independent contractor analysis will likely remain even with the adoption of these new rules.
- What’s Next?
Whether the proposed rules will be enacted as written remains to be seen. The rules will officially be published October 13, which means that interested parties can provide comments up to November 18, 2022. McMahon Berger has previously submitted comments to Department of Labor proposed rules which yielded significant changes and clarifications, so interested parties should feel free to contact this Firm or other experienced counsel to submit comments to the Department on this proposed rule.
It is likely that business groups and industries which rely on independent contractors for their business models will also challenge the new rules in court once they are enacted. The basis and likelihood of success for such challenges also remains to be seen.
Although it is unclear exactly what the future of the new independent contractor rules will be, businesses who utilize independent contractors would be well advised to review these new rules and confer with experienced labor and employment counsel to ensure compliance going forward.
The St. Louis employment attorneys at McMahon Berger have been representing employers across the country in labor and employment matters for over sixty years and are available to discuss these issues and others. As always, the foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation as every situation must be evaluated on its own facts. The choice of a lawyer is an important decision and should not be based solely on advertisements.