DOL Announces Final Rule Clarifying Classification of Independent Contractors
In September 2020, the Department of Labor issued a proposed rule clarifying how to analyze whether a worker can be classified as an independent contractor or an employee, a summary of which can be found here. On January 6, 2021, after considering public comments, the DOL announced its final rule, which remains largely unchanged from the initial proposal and is scheduled to take effect March 8, 2021.
In the final rule, the DOL reaffirmed that the “economic reality” test is the appropriate metric to assess the classification of a worker and that five factors guide this analysis, giving the first two “core” factors the most weight. Perhaps most helpful are the nuanced examples the DOL provides for the first time in its final rule. Each example analyzes a particular factor using specific limited facts, described within the setting of a certain industry. These examples provide insight as to how the factors may be evaluated under “substantially similar factual situations.” A few of the most helpful examples are summarized below:
“Nature and Degree of Control Over the Work” Example: An individual owns and operates a tractor-trailer and performs transportation services for a logistics company. At its own expense, the logistics company installs a device on the vehicle that limits and monitors its speed to ensure it complies with federally-mandated motor carrier safety regulations and local traffic laws. The company requires the owner-operator to meet contractually agreed-upon delivery deadlines.
Analysis: The owner-operator exercises substantial control over key aspects of her work, which indicates independent contractor status. The device installed was to help comply with legal obligations and ensure safety, and the agreed-upon delivery deadlines are typical of contractual relationships between businesses that do not constitute “control.”
“Opportunity for Profit or Loss” Example: An individual accepts assignments from a company that provides an app-based service linking customers with individuals who perform home-repair work. The individual invests in his own equipment, but the company invests millions of dollars in the app and its marketing.
Analysis: The opportunity for profit or loss favors independent contractor status. The value of the company’s substantial investment is not relevant to whether the individual had a meaningful opportunity for profit or loss.
“Degree of Permanence of the Working Relationship” Example: A housekeeper works for a ski resort every winter and stops at the end of each winter when the resort shuts down. He returns to his housekeeper position each winter without formally applying or interviewing.
Analysis: This weighs in favor of classification as an employee. His work period is a result of the seasonal nature of the ski industry and, thus, is not “sporadic.” Further, that he returns each season demonstrates that the relationship is indefinite.
“Whether the Work is an Integrated Unit of Production” Example: A part-time newspaper editor works from home and assigns and reviews many articles published by the newspaper. She also sometimes writes or rewrites articles. She makes assignment and lay-out decisions in coordination with several full-time editors who are employees of the newspaper.
Analysis: The editor is part of an integrated unit of production because she is involved in the entire production process and performs the same work as other employees. This points to her being an employee. That she works from home does not outweigh these other considerations.
Additional details and examples can be found here [https://www.federalregister.gov/documents/2021/01/07/2020-29274/independent-contractor-status-under-the-fair-labor-standards-act#sectno-reference-795.115].
Although this final rule is good news for employers, it is sure to face legal challenges, both because it is arguably more employer-friendly than the analysis applied by a number of federal courts and because of its eleventh-hour release by a lame duck administration. Thus, as before, employers should proceed cautiously when classifying workers. Take the time to fully understand all of the facts underlying the relationship between the worker and the company. The fact-specific nature of worker classification is what makes it so complicated and prone to challenge. Moreover, different states, and even courts in different jurisdictions, evaluate the same facts differently. And the risk of misclassification can be quite costly. Thus, it is always worth seeking legal advice at the outset when you are first evaluating the classification, rather than later when defending it in litigation or a DOL audit.