RPJ Partner Deena Merlen Discusses Developments in Worker Classification under the FLSA

The classification of a worker as an employee or an independent contractor can make a big difference in terms of the worker’s rights and the employer’s obligations.  For example, under the Fair Labor Standards Act (the “FLSA”), covered employers must pay their non-exempt employees no less than the then-current federal minimum wage, and they must pay them at least one and one-half times the employees’ regular rate of pay for each hour worked in excess of 40 hours in a workweek.  In contrast, the FLSA provides no such guarantees to independent contractors performing services.

In January of 2021, the U.S. Department of Labor (the “Department”) published a final rule titled “Independent Contractor Status Under the Fair Labor Standards Act” (the “2021 IC Rule”), which was to take effect as of March 8, 2021. The 2021 IC Rule provided guidance on the classification of workers as either independent contractors or employees under FLSA and it materially changed the economic realities test that has largely been applied, with some variation, by the Department and courts since the 1940s in making such determinations.

However, four days before the 2021 IC Rule was to take effect, the Department delayed its implementation, and the Department subsequently published a rule withdrawing the 2021 IC Rule in its entirety.  This, in turn, was challenged by a lawsuit decided on March 14, 2022, when a Federal district court in Texas vacated the withdrawal and held that the 2021 IC Rule was effective as of March 8, 2021 after all.

Last week, nearly three years to the day after publishing the 2021 IC Rule, the Department announced a new independent contractor rule that formally rescinds the 2021 IC Rule and provides many important clarifications and guidance concerning the multifactor analysis long used by the Department and case law for determining whether a worker is an independent contractor or an employee under the FLSA. As explained in the new rule published last week, “the Department believes that the 2021 IC Rule did not fully comport with the FLSA’s text and purpose as interpreted by the courts. The Department further believes that leaving the 2021 IC Rule in place would have a confusing and disruptive effect on workers and businesses alike due to its departure from decades of case law describing and applying the multifactor economic reality test as a totality-of-the-circumstances test. . . . [The 2021 IC Rule’s] novel narrowing of the test under which certain factors are always elevated and other facts are essentially precluded from consideration may result in misapplication of the economic reality test and an increased risk of FLSA-covered employees being misclassified as independent contractors.”  (Italics added for emphasis.)

Among other things, the final rule published last week provides that each of the following six factors are to be included in the analysis of the worker’s relationship with an employer in determining whether a worker is properly classified as an employee or an independent contractor:

  • any opportunity for profit or loss the worker might have in connection with the services provided;
  • the financial stake and nature of any resources the worker has invested in the work;
  • the degree of permanence of the work relationship;
  • the degree of control the employer has over the worker’s work;
  • whether the work performed by the worker is essential to the employer’s business; and
  • a factor regarding the worker’s skill and initiative.

The new rule can be read here and will be effective as of March 11, 2024.

This article is intended as a general discussion of these issues only and is not to be considered legal advice or relied upon. For more information, please contact RPJ Partner Deena R. Merlen, who counsels clients in areas of employment and labor law, intellectual property, media and entertainment, general business law, commercial transactions and dispute resolution. Ms. Merlen is admitted to practice law in Connecticut and New York.