Department of Labor Withdraws Final Rule Regarding Employee Classification Under FLSA
There is ongoing debate and confusion for employers surrounding employee classification, particularly when it comes to independent contractors. The Fair Labor Standards Act (“FLSA”) requires covered employers to pay nonexempt employees at least the Federal minimum wage for every hour worked and overtime pay for every hour worked over 40 in a work week, and must keep certain records regarding employees. See 29 U.S.C. §§ 206(a), 207(a) (minimum wage and overtime pay requirements); 29 U.S.C. § 211(c) (recordkeeping requirements). These FLSA protections do not apply to independent contractors but the FLSA does not define the term “independent contractor.” With the proliferation of gig and freelance workers, alternate work arrangements, and the expansion and ease of engaging workers remotely, the ability for employers to determine whether a worker is properly engaged as an independent contractor is both critical and difficult. The DOL attempted to provide guidance with a Final Rule (“Final Rule” or “Independent Contractor Rule”) on January 6, 2021, but the DOL withdrew that Rule on May 5, 2021.
DOL’s Independent Contractor Rule Revamps “Economic Reality” Test
In response to the need to better define who qualifies as an independent contractor or an employee under the FLSA, on January 6, 2021, the Wage and Hour Division of the DOL issued a Final Rule that set forth a revamped multifactor “economic reality” test. The test generally focuses on whether a worker is in business for herself or himself (independent contractor) or is instead economically dependent on an employer for work (employee). The DOL’s Final Rule included five factors to consider when applying the test: (1) the nature and degree of the worker’s control over the work, (2) the worker’s opportunity for profit or loss based on initiative, investment, or both, (3) the amount of skill required for the work, (4) the degree of permanence of the working relationship between the individual and the potential employer, and (5) whether the work is part of an integrated unit of production.
Prior to the Independent Contractor Rule, all five factors were unweighted. Rather than treat the factors as unweighted or afford them equal weight, the Independent Contractor Rule elevated the comparative value of two “core factors” – (1) worker’s control over the work and (2) worker’s opportunity for profit or loss. The Final Rule explained that these two factors “are more probative of the question of economic dependence or lack thereof than other factors, and thus typically carry greater weight in the analysis than any others.” See Independent Contractor Status Under the Fair Labor Standards Act, 86 Fed. Reg. 1168 (January 7, 2021) (29 CFR Parts 780, 788 and 795). In other words, if both of these “core factors” point one way or the other, “there is a substantial likelihood that is the individual’s accurate classification.” Id. at 1246.
The DOL also included a catch-all category wherein additional factors may be considered “but only if the factors in some way indicate whether the individual is in business for him- or herself, as opposed to being economically dependent on the potential employer for work.” Id. at 1247. Analysis necessarily focuses on the actual practice instead of any contractual agreement or what could potentially happen. Id.
DOL Proposes Withdrawal of the Independent Contractor Rule
On March 12, 2021, the DOL proposed withdrawal of the Independent Contractor Rule for several reasons, including that the standard had not yet been utilized by any court or the Wage and Hour Division, due to concern as to whether the revamped test aligned with the FLSA’s “text and purpose,” concern about emphasis of certain factors over others and whether the Final Rule would create further confusion and inconsistencies meant to avoid.
DOL Withdraws Independent Contractor Rule
On May 5, 2021, the DOL withdrew the Independent Contractor Rule, effective May 6, 2021. In its public announcement, the DOL stated it was withdrawing the rule for several reasons, including:
- “The independent contractor rule was in tension with the FLSA’s text and purpose, as well as relevant judicial precedent.”
- “The rule’s prioritization of two “core factors” for determining employee status under the FLSA would have undermined the longstanding balancing approach of the economic realities test and court decisions requiring a review of the totality of the circumstances related to the employment relationship.”
- “The rule would have narrowed the facts and considerations comprising the analysis of whether a worker is an employee or an independent contractor, resulting in workers losing FLSA protections.”
The DOL also withdrew two related Opinion Letters as being prematurely issued.
What does this mean for your Nevada business?
The DOL has not stated if it intends to develop new regulations addressing the ongoing challenges that continue to confront employers, courts and the DOL’s own interpretation of the law. Instead, as noted in the Federal Register, the DOL stated that it “did not propose and is not now issuing regulatory guidance to replace the guidance that the Independent Contractor Rule would have introduced.” Furthermore, the DOL “is not creating a new test, but is instead leaving in place the current economic realities test which allows for determinations that some workers are independent contractors.”
At the state level, in 2019, Nevada enacted a wage and hour law that presumes the existence of an independent contractor relationship if certain criteria are met. NRS 608.0155. At the same time, Nevada added statutory penalties for the misclassification of an independent contractor. NRS 608.400 et seq. Additionally, employers should be mindful that various state and federal governmental agencies have adopted different independent contractor tests that may have additional implications for your business. If you are considering engaging a worker on an independent contractor basis, please reach out to one of the attorneys in our Employment & Labor Law Practice Group.
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