Department Of Labor Clarifies Fair Labor Standards Act Test For Determining Employee Or Independent Contractor Status

What does the new Rule say?

On January 6, 2021 the U.S. Department of Labor issued a final Rule, which takes effect on March 8, 2021, and which clarifies the standard the DOL will use to determine independent contractor status under the Fair Labor Standards Act. Although Employers should become familiar with and apply the test under the Rule, there is speculation that it will be overturned by the Biden Administration or rejected by courts.  Employers should not assume either will happen, however. At a minimum, compliance with the Rule permits raising a good faith defense.

The Rule continues the “economic reality” test previously adopted by the DOL to determine if a worker is an independent contractor or an employee but identifies two “core factors” it will apply in determining proper classification: the nature and degree of control over the work and the worker’s opportunity for profit or loss based on initiative, and/or investment. Three other factors the DOL will consider (especially where the two core tests point in opposite directions) are: the amount of skill required to perform the work; the degree of permanence of the relationship and whether the work is part of the Employer’s business or a separate activity. The more skill required to perform the work, the less permanence in the relationship and the less the work is integrated into the Employer’s unit of production are indications of and independent contractor status. The less skill required to do the work, the more permanence to the relationship and the more the work is an integrated part of a unit of production, the more likely the relationship will be classified as an employee. The permanence test may be judged by whether the worker provides services to more than one “Employer.”

It is important for Employers to understand that the above-described factors will take precedence over what the parties call their relationship or what a contract contemplates. In the words of the DOL: “The particular practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.”

Why is it important for Employers to know and comply with the DOL test?

Misclassification of employees as independent contractors can be very costly. Misclassified employees can recover not only wages calculated at the minimum or higher applicable wage, but one-and-one-half times that wage for any overtime pay they would have earned had they been classified properly.  An employee who successfully sues an Employer for misclassification can recover liquidated damages in an amount equal to the unpaid wages, (including overtime wages), plus attorneys’ fees and the costs of suit.  In a class or collective action these damages can become very large numbers quickly. Additional fines may be imposed and, under section 16(a) of the FSLA, “any person” shown beyond a reasonable doubt to have violated the FLSA intentionally, deliberately, and voluntarily, or with reckless indifference to or disregard for the FLSA’s requirements can be subject to criminal penalties. This means that managers of an Employer who have responsibility for assuring proper payment of wages face criminal exposure. In recent years, both the Department of Labor and state agencies that enforce state wage laws have intensified misclassification investigations and enforcement actions not only to assure that employees are paid what they are owed and receive other benefits that an Employer provides to employees but not to independent contractors, but because Employers generally do not pay required taxes on misclassified employees. That failure implicates liability under federal and state revenue laws which also provide for penalties, interest and criminal liability.

Additional concerns flowing from misclassification under the FSLA are that confidential settlement of lawsuits may not be possible but might require approval by either the DOL or a federal court for any release to be valid; and such suits, when they become known to the DOL and/or state agencies, might invite further investigation into an Employer’s historic classification practices, raising the specter of even greater financial exposure.

If an Employer satisfies the Rule’s tests for independent contractor classification can it stop worrying about misclassification?

In a word “NO!” First, employers must be aware that each state has wage and hour laws that parallel but are not identical to the FLSA. Some states apply different tests in determining proper classification. In this region, it is especially difficult under New Jersey’s wage and hour law properly to classify a worker as an independent contractor. Accordingly, Employers must be cognizant of the laws of all states in which they have workers. Furthermore, the test applied by the DOL and state analog agencies might not be the same test that other regulatory agencies apply in enforcing other laws such as anti-discrimination laws. (e.g. Title VII of the Civil Rights Act of 1964, Pennsylvania Human Relations Act; New Jersey Law Against Discrimination) Employers must evaluate worker status not only with wage and hour concerns in mind but under all applicable laws and recognize that it is possible for a worker to be an employee for purposes of one statute but not for another.

If you have any questions, or would like additional information, please contact Bob Small, Partner in Reger Rizzo & Darnall’s Employment Practices Group, at 215.495.6541, or via email at rsmall@regerlaw.com. While this rule change is anticipated to take effect in March, this rule change itself may be subject to change. Please follow us and/or contact Mr. Small to keep abreast of current conditions.

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