Labor Department issues final independent contractor rule

The U.S. Department of Labor on Wednesday issued a final rule clarifying the standard for determining independent contractor status under the federal Fair Labor Standards Act, but there are several major states with stricter qualifications, and the rule may eventually be overturned by the new administration, experts say.

However, some experts praised the rule.

The final rule issued by the department, which takes effect March 8, reaffirms an “economic reality” test to determine whether an individual should be considered an independent contractor or as an employee under the FLSA, the DOL said in its statement.

It said the two “core factors” in determining this are the nature and degree of control over the work and the worker’s opportunity for profit or loss based on initiative, and/or investment.

The statement said 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, are the amount of skill required for the work; the relationship’s degree of permanence and whether the work is part of an integrated unit of production.

“The particular practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible,” the DOL’s statement said.

Experts, who say the final rule differs little from a proposal issued in September, point out that New York, California, Connecticut, New Jersey and Massachusetts all have stricter regulations determining who can be considered an independent contractor, which would take precedence in those states.

In these other states it is very hard to be considered an independent contractor, and this could become an issue for employers who also have workers in other states, said Jonathan A. Segal, a partner and managing principal with Duane Morris LLP in Philadelphia.

“If you operate in a jurisdiction or jurisdictions where the local rules are more generous to employees….then you’ve got to worry about” about this issue, because if you misclassify workers under these state laws “you’ve got problems,” said Eric B. Meyer, a partner with FisherBroyles LLP in Philadelphia.

He added, however, that the rule will apply to the majority of states, including Texas.

In addition, under the Biden Administration, “The rule may be changed sooner rather than later,” Mr. Segal said. Many observers have said they expect the Biden Administration to be active on the issue of making it easier for independent contractors, including gig economy workers, to be considered as employees.   

This is not likely to be a top priority of the Biden Administration, however, observers say. “I assume that this isn’t a bell that can’t be unrung, but I wonder” about its priority among the hierarchy of issues the Biden Administration will deal with, Mr. Meyer said. 

Mr. Segal said also, “You can’t necessarily conclude the FLSA rule will apply to every other federal law,” including Title VII of the Civil Rights Act of 1964, which is enforced by the U.S. Equal Employment Opportunity Commission.

Furthermore, federal courts are not obligated to follow the rule, and may not defer to it, experts say.

Mr. Meyer added, however, that for those states where the rule applies, it adds a level of guidance and specificity and a roadmap for employers to follow.

Michael Lotito, co-chair of Littler Mendelson P.C.’s Workplace Policy Institute in San Francisco, said, “It’s extremely well-reasoned and based on sound precedent. I think the department has issued a rule that’s going to withstand the kind of challenge that’s almost a foregone conclusion from a litigation perspective.”

Mr. Lotito said, “I’m also happy that it really understands we’re going through an enormous workforce transition, and individuals have to have the opportunity to exercise choice as to how they would like to be integrated into an organization” with some wanting to become employees and others to become independent contractors.