The U.S. Department of Labor’s New Rule Clarifies Employee and Independent Contractor Status Under the Fair Labor Standards Act

On January 6, 2021, the U.S. Department of Labor (USDOL) announced a final rule clarifying who is an “independent contractor” and who is an “employee” under the Fair Labor Standards Act (FLSA) and subject to its requirements. The
USDOL’s final rule draws on the knowledge its staff gained by examining decades of court opinions and numerous State laws regarding the classification of workers as employees versus independent contractors. Over the past few decades this issue
has been a cause of tension between politicians supporting liberal worker driven policies and politicians that support conservative entrepreneurial focused policies.

Recently, this issue has gained prominence as a major public issue for the States to address due to the rapid rise of internet-based ridesharing companies that consider their drivers to be independent contractors. For example, last year California
passed a law that changed the classification of drivers for the prominent ridesharing companies in that state to employees, rather than independent contractors. However, the status change caused a public outcry from the independent contractor community because the changes placed significant economic pressure on workers that were traditionally considered independent contractors, like artists, photographers, and freelance writers. The independent contractor community expressed concerns that the status change deprived them of their ability to control their profits and losses in addition to restricting their ability to create flexible and innovative work schedules. As a result, the California law
was eventually modified in November of 2020 and those workers have no regained their status as independent contractors.

Realizing that the States have been unable to find a uniform resolution to the independent contractor versus employee debate, the USDOL has now stepped in by announcing its new rule that establishes a clear standard that should be used by
employers when determining whether to classify a worker as an independent contractor or as an employee. While formulating this new rule, the USDOL has tried to be mindful of the delicate balance between extending the protections
offered to employees by the FLSA versus encouraging/deterring the entrepreneurial spirit that motivates many workers that choose to be independent contractors. 

After reviewing comments from over 1,800 individuals and organizations and analyzing decades of legal decisions expressing various opinions concerning when a worker should be classified as an independent contractor, the USDOL will now apply the “economic reality” test moving forward. The economic reality test essentially poses this question: does the worker depend on a business or entity for the opportunity to work, or is the worker essentially in business for him/herself? 

The first example is an employee; the second an independent contractor.

The economic reality test considers whether a worker is in business for himself or herself (independent contractor) or is economically dependent on a putative employer for work (employee) by examining two core factors, specifically the
nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on the worker’s own initiative and/or investment. The economic reality test also identifies three other factors that may serve as further guideposts in the analysis: the amount of skill required for the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work is part of an integrated unit of production.

The final rule also advises employers that the actual practice and general way the work is performed by their workers is more relevant to the economic reality analysis than what may be contractually or theoretically possible.  The rule works to simplify the compliance for businesses and aims to improve conditions for workers. The USDOL believes that by restructuring and clarifying the test to classify independent contractors, they can reduce the total number of workers that are misclassified. It should be noted that the improper classification of workers will still be vigorously prosecuted by the USDOL. 

The State of New Jersey has also recently made a push to crack down on the intentional misclassification of workers by increasing the administrative penalties that may be assessed against employers for such offenses. For example, the
Commissioner of New Jersey’s Labor and Workforce Development (“Commissioner”) now has the power to issue a penalty against an employer in the amount of $250 per misclassified worker for first time violations and $1,000 per
misclassified worker for subsequent violations. Additionally, the Commissioner has the power to post the name of any person or entity (including, but not limited to, a company corporate officer or principal, corporations, contractors, and
subcontractors) found to be in violation of any state wage, benefit, or tax law on the internet for public inspection.

The final rule issued by the USDOL becomes effective on March 8, 2021, and its clarity will hopefully make it easier for employers to properly classify their employees while respecting the desire of workers to have work autonomy and
individual entrepreneurialism. Moving forward, in order to avoid potential fines and penalties, employers should take time to examine their current worker classifications to ensure that their independent contractors satisfy the economic reality test by, for example, maintaining a file for each independent contractor that identifies the legal name and address of the independent contractor’s separate business entity, invoices for the work performed by that contractor, and all written contracts that describe the duties and services provided by that independent contractor.

If you have any questions about the topics raised herein or about any other labor relations matter, please do not hesitate to contact the attorneys at Tobia & Lovelace Esqs., LLC at 973-746-6000 for further information.

Authors: Ronald L. Tobia, Esq. and Othiamba N. Lovelace, Esq.