Federal Court Reinstates U.S. Department of Labor’s Rule on Classification of Workers as Independent Contractors or Employees under the Federal Fair Labor Standards Act

Written By: Steven C. DePalma

On March 22, 2022, a Federal Court reinstated a previously withdrawn final rule issued by the U.S. Department of Labor (“DOL”) on January 6, 2021 that clarified the standards to determine whether a worker should be classified as an employee or independent contractor under the federal Fair Labor Standards Act (the “Final Rule”).  This employer friendly rule reaffirmed the economic reality test and emphasized two core factors in its analysis under the Final Rule: (1) the nature and degree of the worker’s control over the work; and (2) the worker’s opportunity for profit or loss based on initiative, investment, or both.  

Soon after the Final Rule was issued, it was withdrawn by the DOL under the Biden Administration.  In response, trade organizations challenged the DOL’s withdrawal, and on March 22, 2022, a Federal Court reinstated the Final Rule finding that the DOL violated the Administrative Procedures Act (“APA”) when it failed to engage in notice and comment as required by the APA.  The Final Rule is now deemed to be retroactively effective as of March 8, 2021.

This decision brings welcome clarity to businesses and others seeking guidance and transparency as to how the DOL would analyze the question of whether a given worker was an “independent contractor” or an “employee” under the FLSA (thus entitled to, among other things, minimum wage and overtime).

The Final Rule includes the following clarifications:

• Reaffirms an “economic reality” test to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).
• Identifies and explains two “core factors” that are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself:  (a) the nature and degree of control over the work; and (b) the worker’s opportunity for profit or loss based on initiative and/or investment.
• Identifies three other important factors that may serve as additional guideposts in the analysis, particularly when the two core factors do not point to the same classification. These factors are: (a) the amount of skill required for the work; (b) the degree of permanence of the working relationship between the worker and the potential employer; and (c) whether the work is part of an integrated unit of production.
• The actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
• Provides six fact-specific examples applying the factors.

The DOL rule on independent contractors is in addition to federal and  state laws.  The Final Rule does not  prevent states and localities from imposing more stringent classification requirements. Employers must follow the rules or laws that create the most protection for employees.  In light of the changing landscape of this rule, as well as state-specific considerations, employers are cautioned to be diligent about worker classification to ensure compliance with all current federal and state laws. Employers should take steps now to ensure the proper classification for their workers and thus avoid future liability for misclassification. However, further challenges to the Final Rule are expected.  We will monitor the implementation of this rule to determine whether employers will be able to benefit from the DOL’s first rule on this subject.

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