Transportation Executive Summary: U.S. Department of Labor Announces Rulemaking Regarding Employment Status
Recently, the U.S. Department of Labor (“DOL”) has published a Notice of Proposed Rulemaking to help employers and workers determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (“FSLA”). The Notice can be accessed here.
Because of the ongoing interest in the employee versus independent contractor debate in the transportation industry, the Notice and the direction it seeks to signal is worthy of commentary.
Employee v. Independent Contractor: Why Does it Matter?
The classification of a worker as an employee or independent contractor becomes important in relation to the FLSA. The FLSA generally requires covered employers to pay nonexempt employees at least the federal minimum wage for all hours worked, and at least one and one-half times the employee’s regular rate of pay for overtime work. Importantly, the FLSA’s minimum wage and overtime pay protections do not apply to independent contractors. For over seven decades since the FLSA’s implementation, courts have been utilizing the Economic Realities Test to determine if a worker is an employee or independent contractor. The ultimate inquiry of this test is whether the worker is either economically dependent on the employer for work (and thus an employee) or is in business for themselves (and thus an independent contractor). To answer this ultimate inquiry, courts across the country have developed a series of factors to guide their analysis. These factors include: the opportunity for profit or loss, investment, permanency, the degree of control by the employer over the worker, whether the work is an integral party of the employer’s business, and skill and initiative.
Despite relative consistency in the application of the Economic Realities Test, in 2021 the DOL released a final rule titled “Independent Contractor Status Under the Fair Labor Standards Act”. The 2021 IC Rule created a list of five factors that courts could consider, and gave great importance to two of these five factors – nature and degree of control over the work and opportunity for profit or loss. In fact, the 2021 IC Rule released by the DOL stated that if these two “core” factors indicate the same classification, there is a substantial likelihood that is the worker’s accurate classification. The same rule also diminished the importance of other factors, including investment, amount of skill required, and the permanence of the working relationship. After a series of misclassification of employees, the DOL determined that the 2021 IC Rule had created more issues than it had solved, and needed replacement.
Discussion of Proposed Rule
In replacing the 2021 IC rule, the DOL is proposing an analysis that once again highlights the economic reality test and associated factors. In short, the following four major changes will be made to the analysis framework that was established by the 2021 IC Rule.
Returning the Totality of the Circumstances Analysis
The DOL found that the 2021 IC Rule was too narrowly focused on slight variations among factors rather than the broader fact that the ultimate inquiry has remained unchanged – is a worker in the business for themselves? While the factors listed are certainly relevant, the DOL emphasizes in the new rule that the factors are only guideposts, and that “dependence that indicates employee status” is the ultimate question.
Thus, instead of the strict five factor analysis with some factors being more important to others, the DOL is returning to the previous model. This model has the five factors that were used by the 2021 IC Rule, but also notes that the list is not exhaustive, and that all of these factors have equal weight. The proposed rule also indicates that each factor should be examined and analyzed in relation to one another and to the Act’s definitions. With this proposed change, the DOL reaffirms that the factors should be analyzed in a totality of circumstances capacity.
Investment as a Standalone factor
What relevance will worker investment play moving forward? After previously being removed as a standalone factor under the 2021 IC Rule, the proposed rule will once again make investment a consideration in the future. The new rule states that an investment made by the worker must be capital or entrepreneurial in nature to indicate independent contractor status.
What this means is that such investments will generally support an independent business and serve a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach, thus suggesting that the worker is in business for themselves. The proposed rule also notes that that costs borne by the worker simply to perform their job (e.g. tools and equipment to perform a specific job) are not evidence of capital or entrepreneurial investment. Lastly, in considering investments, a court will analyze a worker’s investments on a relative basis with the employer’s investments.
Additional Analysis Associated with the Control Factor
Previous analysis implemented by the 2021 IC Rule limited the employer control analysis to three areas: the employer controlling the work schedule, compelling attendance, and supervising the work. The new framework specifies that the absence of these apparent forms of control does not invariable lead to the conclusion that the worker is an independent contractor.
Instead, the new rule emphasizes that employers may exercise control in other ways. These other examples of control include relying on technology to supervise a workforce, setting prices for services, or restricting a worker’s ability to work for others. The new analysis relating to the control factor is whether the employer retains control over the meaningful economic aspects of the work relationship such that the control indicates that the worker does not stand apart as their own business.
Integral Factor Interpretation
The previous rule established by 2021 IC Rule stated that, “the relevant facts are the integration of the worker into the potential employer’s production processes, because what matters is the extent of such integration rather than the importance of centrality of the functions performed.” Thus, the previous rule rejects as irrelevant to this factor whether the work is important or central to the employer’s business.
The new rule rejects this finding, and instead returns to the framing of this factor as whether the worker’s work is an “integral party” of the employer’s business. In coming to this determination, the DOL will consider whether the work is critical, necessary, or central to the employer’s business. The Department is returning to the decades-long understanding that that if a worker is performing work that is integral to the employer’s business, it is an indication of employee status. Most courts across the state of Iowa and the United States will adopt a common-sense approach to determine whether the work or service being performed is an integral part of the business.
For more information
Contact John F. Fatino about trucking and transportation regulatory matters at 515-288-6041. Parker S. Howe, associate attorney, assisted in the preparation of these materials.