By: Noah Finkel
Seyfarth Synopsis: After delaying the effective date of a finalized Trump-era interpretive regulation that would have brought much needed clarity to the definition of employee under the Fair Labor Standards Act, the DOL yesterday formally repealed that guidance. The result is that companies, workers, and courts will continue to struggle in classifying which workers are employees and which ones can be independent contractors.
Companies, workers, and courts long have wrestled with how to draw the line between an employee who is subject to various employment laws and an independent contractor who is not. This confusion occurs at several levels:
▪ Companies are subject to a hodgepodge of federal employment laws, many of which provide differing definitions of employee, or none at all;
▪ States also regulate the employment relationship with varying sets of laws and a myriad of different tests to determine who is an employee;
▪ Most tests for employee versus independent contractor are balancing tests that require a multi-factor analysis under which courts can balance those factors in various ways, often depending on the court’s particular jurisdiction or circuit;
▪ The factors that are balanced under these tests often are open to many interpretations by each court; and
▪ These tests for employee versus independent contractor usually were developed before the current era in which workers rarely retain one full-time job throughout their working years and need to be applied to a rapidly evolving economy.
The DOL’s Proposal and Its Short Tenure
The FLSA is among the oldest and most influential employment law statutes and yet it contains no statutory definition of employee. Until January 6, 2021, it had not contained a regulatory definition of the term. That is when the DOL issued its final rule on “Employee or Independent Contractor Classification” in the waning weeks of the Trump administration.
In that rulemaking, the DOL — and consistent with case law and its own sub-regulatory guidance — focused on whether, as a matter of economic reality, the worker is dependent upon the company for work or instead in business for him or herself. In doing so, it set forth two core factors to be considered: (1) the nature and degree of the worker’s control over the work; and (2) the worker’s opportunity to earn a profit or loss.
The rule further provided that, if both factors point toward the same classification, whether employee or independent contractor, then the worker is very likely to be that classification. If, however, those factors point in opposite directions, then three other factors should be considered: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the individual and the company; and (3) whether the work is part of an integrated unit of production.
The rule, which was to be effective March 8, 2021, provided a simpler clearer analysis for determining whether a worker can be classified as an independent contractor under the FLSA. While there was no guarantee that judges would defer to it, it had the potential to be highly influential in courts and possibly harmonize how different circuits analyze whether a worker is an employee or independent contractor.
But following the change in administrations, the DOL delayed the effective date of that rule, proposed withdrawing it, and then, yesterday, formally withdrew its prior guidance. Its main reason for doing so is that the rule elevated two factors — the degree of control and the worker’s opportunity for profit or loss — above other factors that historically had been considered, which the DOL considers in tension with the text and purpose of the FLSA. This is despite the fact that, in 2015 (the last time the DOL was under a Democratic administration), the DOL issued sub-regulatory guidance in the form of an Administrator Interpretation effectively changing the employee vs. independent contractor test from the historic economic realities test to one that focused on economic dependence.
Barring successful litigation, the DOL’s independent contractor regulation is a dead letter.
What Now and What Next?
So what is now the test for employee versus independent contractor under the FLSA? It is the same as it ever was: a balancing test that varies from circuit to circuit, creating litigation results that often seem like they are dependent on each judge’s particular views.
That may not be the case for long, as the DOL under President Biden is expected to issue its own interpretation of how it believes courts should define employee under the FLSA. It remains to be seen when that will occur, what form it will take (will it be by notice-and-comment rulemaking, amicus briefs, opinion letter(s), Administrator Interpretation, or other?), and what its substance will be.
Many in the plaintiffs’ bar have advocated and will advocate for the DOL to adopt the so-called ABC test, which is used with some variations in several states for wage-hour purposes. The version of the ABC test that all but guarantees employee status in most scenarios (and which is currently used in California and Massachusetts), presumes that a worker is an employee unless the company can show that the worker is free from company control and direction in actual practice and per contract, performs work outside the company’s usual course of business, and the worker is customarily engaged in an independently established trade, occupation, or business. Federal adoption of this test, though, is unlikely. Even those who favor a broad definition of employee recognize that the ABC test could not be adopted by the DOL without legislation from Congress. Such legislation exists within the PRO Act, which has been passed by the House, but it is highly unlikely to make it out of the Senate.
More likely, and particularly if, as rumored, David Weil is tapped to be Administrator of the Wage-Hour Division, the DOL will propose a standard similar to the one it issued in its 2015 Administrator Interpretation (which Dr. Weil authored). That standard — focusing on economic dependence — lacks the simplicity and clarity of the now repealed test and likely would be interpreted in a manner to render a greater number of workers employees than under various tests currently used in most circuits.
The extent to which courts would defer to the DOL’s eventual replacement test is an open question. The fact that the definition of employee is becoming one that depends on which party holds the White House — and thus runs the DOL — may make courts view any DOL test with skepticism and thus cause them to fall back on the same varying and elastic tests they have used over the last 80 years in the absence of a DOL definition of employee. The one certainty for independent contractor jurisprudence seems to be a lack of it.