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Employee or independent contractor? DOL finalizes new rule

By Michele C. Spillman

The United States Department of Labor announced a new final rule on January 6, 2021 regarding classification of workers as independent contractors under the federal Fair Labor Standards Act (FLSA).  “Streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility,” said DOL Wage and Hour Division Administrator Cheryl Stanton.  The rule takes effect on March 8, 2021, absent action by the new administration (more on that below).

The FLSA entitles employees, but not independent contractors (aka “freelancers,” “gig workers,” and “consultants”), to certain protections, such a minimum wage and overtime requirements. Classification of workers has long been a confusing issue for employers because neither the FLSA nor its regulations define “employee” or “independent contractor.”

contract gig workerDOL has historically used the “economic reality” test to determine whether a worker is an employee or independent contractor. Under the economic reality test, “[I]n the application of the FLSA an employee, as distinguished from a person who is engaged in a business of his or her own, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves.” Department of Labor. (2008).  Employment Relationship Under the Fair Labor Standards Act [Fact Sheet 13].

In applying the economic reality test, DOL relied on six factors developed by the U.S. Supreme Court. But these factors often proved difficult to apply and led to conflicting results across various employers and industries, making worker classification a moving target and a hotly debated issue.

The new rule reaffirms the “economic reality” test, but identifies and explains two “core factors” that are most probative to the question of whether a worker is in business for herself (an independent contractor) or someone else (an employee): (1) the worker’s nature and degree of control over the work; and (2) the worker’s opportunity for profit or loss based on initiative and/or investment.

DOL identified three other factors that “may serve as additional guideposts in the analysis, particularly when the two core factors do not point to the same classification”: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the worker and the potential employer; and (3) whether the work is part of an integrated unit of production.

Despite this clarification, worker classification remains a very fact-specific inquiry. As DOL cautions, “the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.”

Whether the final rule will become effective as planned remains a question. President-Elect Biden has pledged to combat worker misclassification, and many predict he will freeze the rule when he takes office on January 20, 2021.

We will continue to post updates on new guidance from DOL and other federal agencies on our website.  For more information, consult with a Phillips Murrah labor and employment attorney.


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With a background in both commercial litigation and labor and employment law, Michele offers clients comprehensive solutions to meet their business goals.

For more information on how this DOL guidance may impact your business, please call 214.615.6365 or email Michele C. Spillman. Click HERE to visit her profile page.

For ongoing coverage of information related to COVID-19, please visit our COVID-19 Resource Center.  

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Department of Labor files overtime exemption brief with Fifth Circuit

In a brief filed with the Fifth Circuit of the Federal Court of Appeals, USDOL seeks to preserve salary level in determining overtime exemption status.

 

On Friday, June 30, the United States Department of Labor filed a brief with the Fifth U.S. Circuit Court of Appeals in New Orleans seeking to preserve a minimum salary requirement as a part of a three-part test to determine which workers are exempt from Fair Labor Standards Act (FLSA) minimum wage and overtime pay protections.

The three-part test, referred to as EAP, (executive, administrative, professional) relates to whether a worker is:

  1. Paid on a salary basis
  2. Earns a specified salary level
  3. Satisfies a duties test

The brief filed Friday concerns the second part.

The brief was filed in the case of Nevada v. DOL , 5th Cir., No. 16-41606 by the State of Oklahoma and 20 other states questioning whether the DOL under President Obama had the authority to set the annual salary threshold at $47,476, just over double the amount previously set in 2004 by the Bush Administration.

The Trump Administration brief asks the court to uphold DOL’s legal authority to set the salary threshold, but does not address the appropriate salary level, stating that the court should “simply lift the cloud” created by litigation questioning the Department’s authority to establish any salary level test.

“Instead, the department soon will publish a request for information seeking public input on several questions that will aid in the development of a proposal,” the agency stated it its brief.

To view the brief, click this link.

 


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USDOL withdraws 2015 and 2016 informal guidance on joint employment and independent contractors

On Wednesday, June 7, 2017, the U.S. Department of Labor’s Office of Public Affairs announced the withdrawal of recent guidance regarding joint employment and independent contractors.

OPA News Release:
June 7, 2017 [link] WASHINGTON – U.S. Secretary of Labor Alexander Acosta announced the withdrawal of the U.S. Department of Labor’s 2015 and 2016 informal guidance on joint employment and independent contractors. Removal of the administrator interpretations does not change the legal responsibilities of employers under the Fair Labor Standards Act and the Migrant and Seasonal Agricultural Worker Protection Act, as reflected in the department’s long-standing regulations and case law. The department will continue to fully and fairly enforce all laws within its jurisdiction, including the Fair Labor Standards Act and the Migrant and Seasonal Agricultural Worker Protection Act.

The Administrator Interpretation Letters – Fair Labor Standards Act, which have been withdrawn are:

  • FLSA 2015-1: “The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors”
  • FLSA 2016-1: “Joint employment under the Fair Labor Standards Act and Migrant and Seasonal Agricultural Worker Protection Act”

What does this mean for employers?

For employers, this means:

  • Joint employment and independent contractor status are no longer reviewed by the DOL under these previous Administrator’s Interpretations
  • Employees no longer have FLSA 2015-1 and FLSA 2016-1 to cite before the courts.

However, the Administrator’s Interpretations relied upon case law, statutes and regulations that are still good law.  Further, how the courts define joint employment and identify misclassified independent contractors has not changed because the common law, statutes and regulations are still in effect.

The definition of joint employment may depend on the state and federal Circuit Court where the employer is located. Independent contractor status is also defined by the FLSA, common law, statutes, and regulations as well as state law. Some states may have a different standard for independent contractors and joint employment.

Employers should consult with their attorney regarding questions about classifying independent contractors, joint employment and state laws that may vary. Although the removal of the DOL Administrator’s Interpretations is not a change in the law, it may indicate a change in DOL enforcement in these two areas. Stayed tuned for more information or changes from the DOL.