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Remember the 2021 Independent Contractor Rule? Well, forget it or at least most of it. Last week, the DOL published a new final rule for independent contractor status under the Fair Labor Standards Act (the New Rule). The New Rule rescinds the 2021 rule and provides guidance on how to analyze whether an individual should be classified as an employee or independent contractor for DOL purposes.

Why the New Rule?

The New Rule is the DOL’s attempt to align with judicial guidance on independent contractor status and provide clarification to business owners attempting to figure out classification. While there are a few similarities between the 2021 rule and New Rule (for example both identify economic dependence as an important piece of the puzzle), the New Rule differs in several ways. Specifically, the New Rule reinstated the multi-factor economic realities test used prior to the old 2021 rule, weighs all factors equally, adds a sixth factor, and provides additional facts for consideration. Another reason could be that the 2021 rule was the Trump Administration’s rule while the New Rule comes from the Biden DOL.

What do you need to know about the New Rule?

It goes into effect March 11, 2024.

The New Rule applies under the Fair Labor Standards Act (FLSA), not other laws such as the Internal Revenue Code or the National Labor Relations Act. State and local laws may also have their own standard or analysis.

Workers and employers may not sidestep the New Rule by agreeing to independent contractor status or by attempting to waive employee status.

The New Rule applies a totality-of-the-circumstances economic reality test that weighs six factors. Those six factors, none of which are dispositive, include:

1. Opportunity for profit or loss depending on managerial skill

The first factor poses a lot of questions: can the worker meaningfully negotiate the charge or pay for the work, decline the job or choose when to perform the job, engage in personal marketing activities to expand his or her business, and hire other individuals, purchase his or her own materials and equipment, and rent space. If there is no opportunity for a worker to make or lose profit, then the worker is likely an employee.

    2. Investments by the worker and the potential employer

    For this factor, the New Rule requires you to consider the costs to a worker for tools and equipment, labor, costs imposed by the potential employer onto the worker, and the worker’s investments. The focus is on comparing the worker’s and potential employer’s investments.

    3. Degree of permanence of the work relationship

    If the relationship is indefinite, this factor leans toward employee status. On the other hand, if there is a definite duration or if the relationship is defined by a project, the factor weighs in favor of independent contractor status. This factor gets a little tricky when looking at seasonal or temporary work as such work does not necessarily indicate independent contractor status.

    4. Nature and degree of control

    For this factor, consider who sets the worker’s schedule, supervises performance of the work, controls prices, and whether there is an explicit limit to the worker’s ability to work for others.

    5. Extent to which the work performed is an integral part of the potential employer’s business

    This factor focuses on the worker’s function and whether he or she is performing work that is an integral part of the potential employer’s business, not whether the individual is integral. If the worker’s function is critical or necessary to the potential employer’s business, the factor leans toward employee status.

    6. Skill and initiative

    This factor looks at the use of a specialized skill set for the work. The specialized skill alone is not indicative of independent contractor status, as both employees and independent contractors may have specialized skills. Rather, if the worker uses those skills in connection with the “business-like initiative,” the factor suggests independent contractor status. The DOL provides an example of a highly skilled welder who provides a specialty welding service and markets his skills to generate new business. In that case, the New Rule indicates that the facts indicate independent contractor status under this factor.

    In addition to the above, other “additional factors” may be relevant to the analysis. For example, if any fact suggests that the worker is in business for him or herself, that fact may be used in the analysis. Not all of the factors must be met, and no single factor is dispositive.

    Remember, the New Rule is an effort by the DOL to align with judicial precedent and reduce risk that employees are misclassified. As always, we will monitor how the New Rule plays out and whether the DOL’s goals are met. Reach out to your employment lawyers with any questions or if you need help walking through the New Rule’s guidance.  

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    If you were just getting comfortable with the DOL’s final rule on employee versus independent contractor status (which took effect on March 8, 2021), there is bad news… or maybe good news. The DOL announced on October 11, 2022, the publication of a proposed rule that would rescind the earlier Trump administration rule and replace it with a new analysis for determining employee or independent contractor status under the FLSA. Misclassification of employees and independent contractors is always a hot issue for employers because minimum wage, overtime, and recordkeeping rules (not to mention FICA withholding, unemployment taxes, and retirement contributions) apply only to employees. Therefore, the consequences of a misclassification can be costly. In sum, the new proposed rule defines “employee” broadly to encompass any individual “dependent on an employer for work,” whereas it defines “independent contractor” narrowly to include only those individuals or entities who are truly “in business for themselves.”

    What’s Changing?

    The current rule provided two “core factors” that were key and three other factors that could be used to determine whether a worker was “economically dependent” or “in business for him or herself.” Essentially, the rule reaffirmed an economic reality test that considered (1) the nature and degree of control over the work and (2) the worker’s opportunity for profit or loss based on initiative and/or investment.

    The proposed rule seeks to rescind the earlier rule and restore the multi-factor totality of the circumstances test where the factors do not have a predetermined weight and each factor is given full consideration.

    Back to the Past

    The DOL’s proposed rule identifies six factors, which courts have examined for decades, that should be considered when determining the relationship of the parties:

    • Opportunity for profit or loss depending on whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work. Can the worker negotiate pay rates, control the way the work is performed, hire other workers to help complete a task or job, purchase materials or decline work? If so, that suggests the worker is an independent contractor.
    • Investments by the worker and the employer. Is the worker investing capital or entrepreneurial efforts? If so, that could support an independent business and serve a busines function, which suggests independent contractor status. If the worker’s investment is limited to things such as purchasing equipment or tools to perform the job, that worker is more likely an employee.
    • Degree of permanence of the work relationship. How long has the worker been doing this job for the company? Indefinite or continuous relationships indicate an employment relationship, although the lack of a permanent or indefinite relationship does not necessarily make the worker an independent contractor. For example, seasonal and temporary workers may be employees if they are not in business for themselves.
    • Nature and degree of control. This factor is complicated and all about the details. Relevant considerations include scheduling, supervision over the performance of work, whether the worker can work for other organizations, and control over the economic aspects of the work relationship. Because this is a complicated analysis, you will have to work closely with counsel to determine this factor.
    • Extent to which the work performed is an integral part of the employer’s business. Is the work critical, necessary, or central to the employer’s business? If it is integral to the business, the worker is likely an employee. Alternatively, if the work is peripheral to the employer’s business, the worker is likely an independent contractor.
    • The worker’s skill and initiative. Is the worker using specialized skills to perform the work and are those skills contributing to business initiatives consistent with the worker being in business for themselves? If so, that worker is likely an independent contractor. When the worker lacks specialized skills to perform the work, that fact suggests the worker is an employee.

    While the DOL specifically identifies these six factors, it also adds the category of “additional factors” to include any factors that indicate in some way whether the worker is economically dependent or in business for themselves. Each factor is considered in view of the totality of the circumstances, meaning no single factor is determinative or dispositive.

    What’s Next?

    As always, you should keep complying with all federal and state independent contractor rules to minimize the risk of misclassification.

    If you use independent contractors, this could significantly impact your business. This is a proposed rule so you can submit comments through 11:59 p.m. ET on November 28, 2022, to be considered in the final rulemaking. Let the DOL know what you think (good or bad).

    While the final rule may differ somewhat from the proposed rule, we expect the final rule will limit who can be properly classified as an independent contractor. This will have a significant impact on all employers and is certainly an issue to watch. If you have questions about properly classifying your workforce, you should reach out to counsel, and, even if you think you got it right, now might be a good time for an audit to ensure you are in compliance with the current rule and are ready for the future.

    The Department of Labor (DOL) recently proposed new federal regulations regarding how minimum wages will be calculated for federal construction projects. DOL’s new proposal will add to the cost of performing these projects. The comment period for the new regulations will be closing soon, and we then will be able to see what the next steps will be.

    The federal law known as the Davis-Bacon Act, or DBA, became law in the 1930s and provided that workers on federal construction contracts must be paid what is known as the “prevailing wage” for workers in the area of the project. The law was intended to keep federal contractors from bidding work based upon wage rates for workers who could be imported from areas other than where the project was to be performed.

    From the DBA’s inception until the Reagan era of the early 1980s, a methodology was used for determining prevailing wage rates that would allow rates to be based upon as low as 30% of the relevant workforce. The Reagan administration, believing that the DBA rule contributed significantly to inflation, rewrote the rule to take into account a larger cross section of workers.

    The Biden administration now has proposed returning to the pre-Reagan era rule. This proposed change would raise prevailing rates and further allow for periodic upward adjustments for certain wage rates. The Biden administration disputes that the impact of inflation should be considered in implementing the new prevailing wage rule.

    So, if you are a federal contractor performing work subject to the DBA, be on the lookout for new developments regarding prevailing wages soon. Also be ready for increases of applicable prevailing wages as the new regulations are implemented.

    Department of Labor Announces Proposed Rulemaking to Raise Minimum Wage for Federal ContractorsOn July 21, the DOL announced a Notice of Proposed Rulemaking to enforce the Biden Administration’s Executive Order raising the minimum wage for workers under federal contracts to $15 per hour. The proposed rule would go into effect on January 30, 2022. This announcement begins a comment period that will end on August 23, 2021. To record a comment, go to www.regulations.gov. The current federal contract minimum wage is $10.95 per hour.

    Putting the Brakes on the Gig Economy? Biden DOL Delays Effective Date of Final Rule on Independent Contractor StatusOn January 7, we wrote about the DOL’s Final Rule on Independent Contractor Status that was slated to take effect on March 8, 2021. Many employer and business groups applauded the Final Rule because its focus on the economic reality test was intended to make it easier for employers to classify certain workers as independent contractors. The Final Rule was expected to have a particularly positive impact on the “gig” economy, which has classified many workers as independent contractors. In our January post, we noted that we did not know if the Final Rule would survive under the Biden administration. It now appears that it will not.

    On January 20, the Biden administration froze all pending regulations, including the Independent Contractor Final Rule. The DOL received comments from multiple groups, including the U.S. Chamber of Commerce, opposing a delay of the effective date of the Final Rule. Despite this support, on March 2 the DOL announced that it was delaying the Final Rule’s effective date until May 7.

    This delay is likely the death knell for the Final Rule. It also may signal a less employer-friendly DOL for the near future.

    Who’s the Boss? U.S. DOL Issues Final Rule on Independent Contractor StatusEmployers often ask, “Can this worker be an independent contractor?” The answer is often unclear due to the different tests for employee versus independent contractor status, which vary between federal circuit courts and from state to state. In the end, the answer typically depends on how much risk the employer is willing to take. In an effort to simplify the answer, the U.S. Department of Labor (DOL) announced on January 6, 2021, a final rule pertaining to employee versus independent contractor status under the Fair Labor Standards Act (FLSA). The rule is scheduled to take effect on March 8, 2021.

    DOL’s Intent

    With the rule, the DOL intends to address a critical issue for many workers and employers, particularly in the growing “gig” economy. According to Eugene Scalia, the current Secretary of Labor, issuance of the rule was driven in part by the passage of laws such as California’s AB-5, which requires many businesses to change worker classifications and identify workers as employees rather than independent contractors.

    According to Secretary Scalia, the rule provides:

    “guidance, clarifying and harmonizing principles courts have used for decades to determine who is an ‘employee’ under the FLSA. The rule asks whether a worker depends on a business or organization for the opportunity to work, or if instead she’s essentially in business for herself. If the former, she’s an employee; if the latter, an independent contractor.”

    In essence, the final rule focuses on “who is the boss” by “reaffirm[ing] an ‘economic reality’ test [adopted by many federal courts] to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).”

    The Core Factors

    The rule provides two “core factors” that are key to determining whether a worker is economically dependent” or “in business for him or herself”:

    • The nature and degree of control over the work.
    • The worker’s opportunity for profit or loss based on initiative and/or investment.

    Drawing from factors in court decisions and prior guidance, the DOL’s rule identifies three other factors that may be used when analyzing a worker’s status.  They are:

    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.

    The rule provides examples of the factors in application and will be published in the Federal Register on January 7, 2021.

    Whether this rule survives the new administration is yet to be seen.

    New Reality? DOL Publishes Proposed Rule on Independent Contractor StatusWhether a worker is an employee covered by the Fair Labor Standards Act (FLSA) (and potentially entitled to overtime pay or benefits) or an independent contractor who is not covered has been the center of an ongoing legal battle for many years. Most recently, it has been a key issue for those in the growing gig economy. In an effort to clarify the federal standards and provide what many see as a more employer-friendly approach to the issue than taken by the Department of Labor under President Obama, the U.S. Department of Labor (DOL) announced last week a proposed rule to clarify the rules for determining whether a worker is an employee under the FLSA or an independent contractor.

    The proposed rule adopts an “economic reality” test: Is a worker in business for herself (independent contractor) or economically dependent on another entity for work (employee)? Some courts already use this test or a version of it. The DOL’s proposal identifies two “core factors” for consideration:

    Factor 1: The nature and degree of the worker’s control over the work
    Factor 2: The worker’s opportunity for profit or loss based on initiative or investment

    These core factors are designed to help determine if a worker is independent or not.  The DOL also identifies three other factors that it says may help guide the analysis:

      1. The amount of skill required for the work;
      2. An inquiry into how permanent the working relationship is between the worker and the potential employer; and
      3. Whether the work is part of an integrated unit of production

    Taking these factors together, the DOL proposes that when determining whether a worker is an employee or independent contractor the focus should be on the actual practice and not what may be contractually or theoretically possible.

    The DOL says that the proposed rule would be the department’s sole and authoritative interpretation of independent contractor status under the FLSA, replacing prior regulations, opinion letters and guidance. However, in practical terms, the rule does not have the same legal force as the FLSA’s statutory language and could be changed as early as next year if there is a change in the White House.  So, absent Congress passing a law on the issue, it will be up to the courts to decide how much deference to give the DOL’s rule, if it is implemented. In the end, some courts will likely adopt the DOL rule, and some won’t. This judicial reality, combined with the fact that many states have their own wage and hour laws and have passed legislation addressing the employee vs. contractor issue, means it is likely that the DOL’s proposed rule will not end the battle on this issue.

    The Notice of Proposed Rulemaking is fast-tracked for a 30-day review and public comment period.

    FedEx Workers Ruled Employees, Not Independent Contractors - and the IRS Weighs InDevelopments continue to come almost daily about misclassification of employees as independent contractors. Wage and hour cases, tax rulings, and discrimination charges all are part of the mix.

    We have blogged about worker misclassification extensively, covering the DOL guidance from July of 2015, the treatment of Uber and Lyft drivers, and, um, “entertainers” and “cheerleaders.” Now there are two more recent items of interest.

    FedEx Drivers as Employees

    FedEx has been in the news a lot lately. FedEx had a business model for about 10 years in which its drivers were classified as independent contractors. However, FedEx assigned the routes. The drivers reported to FedEx managers. FedEx regulated uniforms. You get the picture. Recently, the Ninth Circuit in California ruled that FedEx drivers were improperly classified and were actually employees. Also, the Seventh Circuit, for Indiana, ruled similarly right after that. There are many more cases in 40 or so other states, and hundreds of millions of dollars are at stake for FedEx in those cases.

    IRS Guidance on Independent Contractors

    The IRS just issued an important guidance on August 19, 2015, cautioning employers to correctly classify independent contractors. The guidance notes that the facts regarding employee classification fall into three categories: Behavioral, financial, and type of relationship. The factors emphasized include whether the company has right of control and whether the work performed is integral to the company’s business. Links to the relevant tests and forms are included in the guidance.

    Finally, I will be participating in a webinar along with two of my Bradley colleagues,  Bruce P. Ely and Summer Davis, discussing worker misclassification on October 7 at 11:30 a.m. central time. I will share the registration link on this blog in the next couple of weeks. We hope that you can join us!

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    Today, the NLRB issued their Final Rule on what constitutes joint-employer status under the National Labor Relations Act. This new rule overrides the old 2020 standard, that was much stricter in what type of control had to exist over employees.

    Who Has the Power?

    Under the new rule, companies or entities can be considered joint employers over a group of individuals if both entities determine one or more of seven different conditions of employment: 1) wages, benefits, and other compensation; 2) hours of work and scheduling; 3) assignment of duties; 4) supervision of those duties; 5) work rules and discipline; 6) hiring and discharge; and 7) safety and health conditions. The new rule looks at whether the possible joint employers have the authority to control those conditions, even if they don’t exercise that control. This is much broader than the 2020 rule that held that joint employers had to possess and exercise substantial direct and immediate control over essential terms and conditions of employment. The NLRB states that this new final rule more accurately reflects the common law definition of joint employers.

    How Does This Affect Us?

    If you share employees with another entity, as either a subcontractor or some other type of relationship, you may be judged to be a joint employer if your relationship gives you the ability to control one of the specified conditions of employment listed above. That may open you up to liability for certain aspects of the NLRA, even if you don’t exercise that control. It is a good idea to look at any relationships and what sort of control may be shared.

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    Recently the U.S. Department of Labor (DOL) issued a final rule that provides, among many other things (the rule is more than 700 pages long), (1) an update to the formula DOL uses to set “prevailing wages” under the Davis-Bacon Act and related regulations, (2) enforcement options for DOL to penalize employers for retaliation, and (3) the codification of annualizing bona fide and unfunded fringe benefits. Davis-Bacon applies to federal contractors and subcontractors performing on contracts in excess of $2,000 for the construction, alteration, or repair (including painting and decorating) of public buildings or public works. The new rule is estimated to impact more than 1 million construction workers.

    Federal contractors, specifically those in the construction area, should take note.

    “Prevailing Wages” Formula

    Currently, DOL identifies a wage rate as prevailing in the area if it is paid to a majority of workers in a classification on the wage survey (i.e., more than 50%). If there is no majority, DOL uses a weighted average.

    In its new rule, DOL adds an intermediate option for a three-step method. If there is no majority, if at least 30% of workers in the classification are paid a certain rate, that rate is the prevailing wage (the “30 Percent Rule”). If there is no prevailing wage under the 30 Percent Rule, DOL will use the weighted average rate.

    Federal contractors should be aware that this three-step method will more than likely require the payment of higher wages to employees.

    New Enforcement Mechanisms for Retaliatory Conduct

    Under the current rules, the DOL could debar contractors for violations but could not order relief to employees who were retaliated against for complaining about violations. To rectify this, the final rule adds new anti-retaliation provisions to enhance Davis-Bacon enforcement. Specifically, the new anti-retaliation provisions aim to discourage contractors, responsible officers, and any other persons from engaging in — or causing others to engage in — business practices that may chill worker participation in the Wage and Hour Division’s investigations or other compliance actions. To more fully deter potential retaliation, the final rule provides the following remedies to make a person “whole” for any violation of the anti-retaliation provisions:

    • Employment;
    • Reinstatement;
    • Front pay in lieu of reinstatement;
    • Back pay and interest;
    • Compensatory damages;
    • Restoration of the terms, conditions, and privileges of the worker’s employment or former employment;
    • The expungement of warnings, reprimands, or derogatory references;
    • The provision of a neutral employment reference; and
    • The posting of a notice to workers that the contractor or subcontractor agrees to along with the Davis-Bacon and related acts anti-retaliation requirements.

    Adding Fringe Benefit Annualization Requirements

    The final rule adds a new paragraph that codifies the long-existing principle of annualization. Annualization is the principle that “prohibits contractors from using fringe benefit plan contributions attributable to work on private projects to meet their prevailing wage obligation” for Davis-Bacon and related regulations-type work. As this is now specifically in the rule, be sure to pay attention.

    Conclusion

    The final rule is expected to be published in the Federal Register soon and will go into effect 60 days from publication. There are many updates for construction employers to note.

    • The prevailing wage rate incorporated in your contract governs. DOL will be looking at these under these new rules so do not be surprised if they change.
    • Adoption of the “three-step” method will more than likely result in higher prevailing wage rates going forward.
    • The new anti-retaliation provisions now call for “make-whole” relief and remedial actions, so there could be relief such as back pay and reinstatement.

    If you are a federal contractor or subcontractor working on public buildings or works, you should immediately review your policies and procedures to ensure you are following the appropriate Davis-Bacon regulations. Be sure to reach out to your favorite employment or government contracts lawyer with questions.