The final regulations on Independent Contractor Status under the Fair Labor Standards Act (“FLSA”), which the U.S. Department of Labor (“DOL”) issued on January 6, 2021, are in substance a restatement and refinement of the law, based on court decisions interpreting the term “employee” for purposes of the FLSA. These regulations, scheduled to become effective March 8, 2021, bring new clarity and predictability to the application of the “economic realities” test that courts traditionally have used in determining an individual’s status as an employee or independent contractor under the FLSA.
The current state of the law governing courts’ interpretation of the “economic realities” test is in need of clarification. Beyond the fact that different federal circuits apply different iterations of the test,[1] the Preamble accompanying the final regulations identifies examples of courts reaching contradictory decisions concerning individuals in substantially similar work relationships.[2] The Preamble also documents how courts have strayed from the U.S. Supreme Court’s initial formulation of the “economic realities” test.[3]
A clarification of the “economic realities” test is certainly helpful to independent entrepreneurs and their clients in structuring an independent-contractor relationship. But it also is helpful in exposing those companies that engage in worker misclassification.
By clarifying the test, the DOL made it easier to identify instances of worker misclassification as well as to confirm legitimate independent-contractor relationships. The only stakeholders whose interests are harmed by clarification are the trial attorneys who otherwise would litigate the ambiguous and uncertain cases. Reducing the number of these ambiguous and uncertain cases should reduce the amount of litigation concerning an individual’s status under the FLSA, as neither plaintiffs nor defendants typically choose to litigate a case that they know they will lose. The clearer and more predictable a test, the fewer cases there will be in which the outcome under the test is uncertain and that require litigation to ascertain the answer.
Even DOL will benefit, as the newly clarified test will enable it to make determinations in worker-classification investigations with greater certainty and, in those cases in which it determines a company to have misclassified individuals, the violating company would more likely acquiesce to the determination rather than litigate a case it would not likely win under the clarified test.
As to whether the final regulations articulate a test that privileges either employee status or independent contractor status, DOL made clear in its Preamble accompanying the final regulations that it endeavored to articulate a test that fairly reflects the decided court decisions interpreting the test.[4] In this regard, DOL officials presumably were mindful when developing these regulations that they would be effective during a Biden Administration and that this was no opportunity to develop a clarified test that privileges independent-contractor status. A fair reading of the final regulations and accompanying Preamble confirms this.
As a threshold matter, the final regulations categorically adopt the “economic realities” test for determining worker status under the FLSA. But this is no trivial concession. While there is no question that courts have nearly unanimously (but not always[5]) applied an economic realities test for determining worker status under the FLSA, there is a compelling argument to be made that the proper test that courts should apply is the common-law test.[6] The final regulations’ adoption of the economic realities test will make it more difficult to convince a court to apply a common-law test for determining worker status under the FLSA.
Another evidence of DOL’s objectivity in this undertaking, and its effort to develop a restated test that accurately reflects the decided court cases – without privileging either status – is provided by DOL’s criticism of the reasoning of court decisions that upheld the independent-contractor status of plaintiffs[7] or vacated trial court decisions holding plaintiffs to be independent contractors.[8] In addition, the Preamble, and text of the final regulations, explicitly reject an arguably pro-independent-contractor analysis of “economic dependence” as including consideration of an individual’s investment in business ventures unrelated to the specific services at issue.[9]
These regulations represent perhaps one of the clearer examples of a regulatory process free of capture by interested stakeholders. Employer groups submitted numerous comments urging DOL to modify its proposed test in ways that would narrow the definition of employee, but such comments are were nearly unanimously rejected. Likewise, worker advocates and organized labor submitted comments urging DOL to modify its proposed test in ways that would expand the definition of employee, but they too were generally, but not always,[10] rejected.
The two “core” factors[11] in the newly articulated test is a novel feature. But the Preamble indicates that DOL attorneys who reviewed the reported court decisions interpreting the “economic realities” test discovered that when these two core factors point in the same direction with respect to a work relationship – whether toward employee status or independent-contractor status – courts consistently have determined the work relationship to be the status to which those two core factors point.[12] And this feature cuts both ways. It creates as much new certainty for exposing worker misclassification as for confirming legitimate independent-contractor relationships.
Finally, by elevating the importance of the actual practice of the parties involved over what may be contractually or theoretically possible,[13] the final regulations vitiate a company’s ability to convert an employment relationship into one of independent-contractor status through its contracts and other arguably artificial means.[14]
The final regulations represent a vast improvement in the state of the law governing the determination of an individual’s status for purposes of the FLSA. This guidance will promote the development of a unified test for all federal circuits and substantially reduce the probability of similarly situated relationships being classified differently. The regulated community deserves the clarity these regulations provide, to both protect the good actors and more readily expose those engaged in worker misclassification.
[1] For example, courts in the First and Fifth Circuits have applied a four-factor version of the “economic realities” test, e.g., Baystate Alternative Staffing v. Herman, 163 F.3d 666 (1st Cir. 1998), Orozco v. Plackis, 757 F.3d 445 (5th Cir. 2014); whereas courts in the Second and Fifth (which is split on this issue) Circuits have applied a five-factor version of the test, e.g., Brock v. Superior Care, Inc., 840 F2d 1054 (2d Cir. 1988), Thibault v. BellSouth Telcoms, Inc., 2010 U.S. App. LEXIS 15267 (5th Cr. 2010); and courts in the Third, Fourth, Sixth, Seventh and Ninth Circuits have applied a six-factor version of the test, e.g., Martin v. Seker Bros., Inc., 949 F.2d 1286 (3d Cir. 1991), Schultz v. Capital Int’l Sec., Inc., 466 F.3d 298 (4th Cir. 2006), Imars v. Contractors Mfg. Servs. Inc., 165 F.3d 27 (6th Cir. 1998), Secretary of Labor v. Lauritzen, 835 F.2d 1529 (7th Cir. 1987), Donovan v. Sureway Cleaners, 656 F.2d 1368 (9th Cir. 1982).
[2] E.g., 86 Fed. Reg. 1168, 1170 (Jan. 7, 2021), wherein the Preamble compares “Sec’y of Labor v. Lauritzen, 835 F.2d 1529, 1534–35 (7th Cir. 1987) (applying six-factor economic reality test to hold that pickle pickers were employees under the FLSA), with Donovan v. Brandel, 736 F.2d 1114, 1117 (6th Cir. 1984) (applying the same six-factor economic reality test to hold that pickle pickers were not employees under the FLSA).” Similarly, at 96 Fed. Reg. 1168 at 1173, the Preamble compares “Cromwell v. Driftwood Elec. Contractor, Inc., 348 F. App’x 57 (5th Cir. 2009) (holding that cable splicers hired by Bellsouth to perform post-Katrina repairs were employees), and Thibault v. BellSouth Telecommunication, 612 F.3d 843 (5th Cir. 2010) (holding that cable splicer hired by same company under a very similar arrangement was an independent contractor)…. The Thibault court distinguished its result from Cromwell in part by highlighting Mr. Thibault’s significant income from (1) his own sales company that had profits of approximately $500,000, (2) ‘eight drag-race cars [that] generated $1,478 in income from racing professionally[,]’ and (3) ‘commercial rental property that generated some income.’ Thibault, 612 F.3d at 849.”
[3] E.g., 86 Fed. Reg. 1168 at 1170, wherein the Preamble observes that “Silk analyzed workers’ investments, 331 U.S. at 717–19. However, the Fifth Circuit has revised the ‘investment’ factor to instead consider ‘the extent of the relative investments of the worker and the alleged employer.’ Hopkins, 545 F.3d at 343. Some other circuits have adopted this ‘relative investment’ approach but continue to use the phrase ‘worker’s investment’ to describe the factor. See, e.g., Keller v. Miri Microsystems LLC, 781 F.3d 799, 810 (6th Cir. 2015); Dole v. Snell, 875 F.2d 802, 805 (10th Cir. 1989),” and that “Rutherford Food’s consideration of whether work is ‘part of an integrated unit of production,’ 331 U.S. at 729, has now been replaced by many courts of appeals by consideration of whether the service rendered is ‘integral,’ which those courts have applied as meaning important or central to the potential employer’s business. See, e.g., Verma v. 3001 Castor, Inc., 937 F.3d 221, 229 (3rd Cir. 2019) (concluding that workers’ services were integral because they were the providers of the business’s ‘primary offering’).”
[4] E.g., 86 Fed. Reg. 1168 at 1194, wherein the Preamble recounts that “The Department’s review of appellate cases since 1975 involving independent contractor disputes under the FLSA supports this criticism. The Department generally found that, in cases where the ‘‘integral part’’ factor was addressed, the factor aligned with the ultimate classification when the ultimate classification was employee.” Also, at 86 Fed. Reg. 1168 at 1196, the Preamble notes that “The NPRM further explained that focusing on the two core factors is also supported by the Department’s review of case law. The NPRM presented a remarkably consistent trend based on the Department’s review of the results of appellate decisions since 1975 applying the economic reality test. Among those cases, the classification favored by the control factor aligned with the worker’s ultimate classification in all except a handful where the opportunity factor pointed in the opposite direction.” And, the Preamble, at 86 Fed. Reg. 1168 at 1198, states that “Among the appellate decisions since 1975 that the Department reviewed, whenever the control factor and the opportunity factor both pointed towards the same classification— whether employee or independent contractor—that was the worker’s ultimate classification.” Moreover, at 86 Fed. Reg. 1168 at 1206, the Preamble states that “The final rule takes into account facts and factors that have historically been part of the economic reality test, and decades of appellate decisions indicating that the two core factors frequently align with the ultimate determination of economic dependence or lack thereof.” Finally, at 86 Fed. Reg. 1168 at 1240, the Preamble observed that “because the Department’s analysis of appellate case law since 1975 has found workers’ control and opportunity for profit or loss to be most predictive of a worker’s classification status, the finalized standard provides more accurate guidance.”
[5] E.g., Tetzlaff v. United States, No. 15-161C, 2015 U.S. Claims LEXIS 1577 (Fed. Cl. Nov. 25, 2015), wherein the U.S. Court of Federal claims reasoned in a lawsuit involving worker status under the FLSA that “’the existence or absence of an employment relationship is to be ascertained . . . by applying the common-law rules realistically, [namely, by] looking to the substance of the arrangement and giving weight to all relevant factors.’ Ill. Tri-Seal Prods., Inc. v. United States, 353 F.2d 216, 173 Ct. Cl. 499, 518 (1965).”
[6] As the Preamble acknowledges, at 86 Fed. Reg. 1168 at 1169, the first federal statute for which the U.S. Supreme Court adopted an “economic realities” test is the National Labor Relations act (“NLRA”) in NLRB v. Hearst Publications, Inc., 322 U.S.111 (1944), and the next federal statute for which the Court adopted an “economic realities” test is the Social Security Act (“SSA”), in United States v. Silk, 331U.S. 704 (1947), and Bartels v. Birmingham,332 U.S. 126 (1947). Congress subsequently repudiated the Court’s adoption of an “economic realities” test for purposes of these two statutes. Building on these decisions, the Court adopted an “economic realities” test for purposes of the FLSA, in Rutherford Food Corp. v. McComb, 331 U.S. 722, 728 (1947). To justify the application of an “economic realities” test to determine an individual’s status, as an employee or independent contractor, under the FLSA, courts commonly make much of the fact that the FLSA defines the term “employ,” at 29 U.S.C. §203(g), to include “to suffer or permit to work.” What such court decisions typically do not mention is the fact that neither the NLRA nor the SSA — which, as noted are the statutes for which the Court initially adopted an “economic realities” test — do not statutorily define the term “employ.” Thus, it seems incongruous that courts rely on the statutory definition given the term “employ” in the FLSA to justify their application of an “economic realities” test for purposes of the FLSA when the Court initially developed the “economic realities” test in the context of two different federal statutes that do not statutorily define the term “employ.” Added to this incongruity is the fact that Congress statutorily defined the term “employee” with identical language in the FLSA and the Employee Retirement Income Security Act of 1974 (“ERISA”), but courts routinely apply a common-law test when interpreting the term employee in the context of ERISA but the quite different “economic realities” test when interpreting the term employee – with the identical statutory definition – in the context of the FLSA.
[7] E.g., 86 Fed. Reg. 1168, 1173, wherein the Preamble “highlighted the decision in Parrish v. Premier Directional Drilling, 917 F.3d 369, as an example of inconsistent articulation of economic dependence,” and at 96 Fed. Reg. 1168, 1174, “highlighted a case in which a court found that workers exercised enough on-the-job initiative for the control and opportunity factors to point towards independent contractor status, but nonetheless found the ‘skill and initiative factor points towards employee status’ due to ‘the key missing ingredient . . . of initiative.’ ’’ 85 FR 60607 (quoting Express Sixty-Minutes Delivery, 161 F.3d at 303).”
[8] E.g., 86 Fed. Reg. 1168 at 1198, wherein the Preamble cited with approval “Agerbrink v. Model Service LLC, 787 F. App’x 22, 25–27 (2d Cir. 2019) (denying summary judgement based solely on disputed facts regarding plaintiff’s ‘control over her work schedule, whether she had the ability to negotiate her pay rate, and, relatedly, her ability to accept or decline work’). The Third Circuit in Razak v. Uber Technologies took a similar approach [emphasizing facts and factors that are more probative of the economic dependence inquiry] by emphasizing disputed facts regarding ‘whether Uber exercises control over drivers’ and had ‘the opportunity for profit or loss depending on managerial skill’ to deny summary judgment. 951 F.3d at 145–47.”
[9] E.g., 86 Fed. Reg. 1168 at 1173, wherein the Preamble rejected the reasoning in Thibault v. BellSouth Telecommunication, 612 F.3d 843 (5th Cir. 2010) (holding that cable splicer hired by same company under a very similar arrangement was an independent contractor)… The Thibault court distinguished its result from Cromwell in part by highlighting Mr. Thibault’s significant income from (1) his own sales company that had profits of approximately $500,000, (2) ‘eight drag-race cars [that] generated $1,478 in income from racing professionally[,]’ and (3) ‘commercial rental property that generated some income.’ Thibault, 612 F.3d at 849.”
[10] E.g., 86 Fed. Reg. 1168, 1199, wherein the Preamble states that “The Department therefore revises § 795.105(c) to more clearly distinguish between a core factor’s probative value as a general matter and its’ weight in a specific case and to clarify that the core factors’ greater probative value means that they typically (but not necessarily) carry greater weight.”
[11] 29 CFR 795.105(d)(1).
[12] The Preamble at 86 Fed. Reg. 1168 at 1197, reports that “the Department did not uncover a single court decision where the combined weight of the control and opportunity factors was outweighed by the other economic reality factors. The Preamble, at 86 Fed. Reg. 1168 at 1196, recounts that “The NPRM further explained that focusing on the two core factors is also supported by the Department’s review of case law. The NPRM presented a remarkably consistent trend based on the Department’s review of the results of appellate decisions since 1975 applying the economic reality test. Among those cases, the classification favored by the control factor aligned with the worker’s ultimate classification in all except a handful where the opportunity factor pointed in the opposite direction.” Moreover, at 86 Fed. Reg. 1168 at 1198, the Preamble reported that “Among the appellate decisions since 1975 that the Department reviewed, whenever the control factor and the opportunity factor both pointed towards the same classification— whether employee or independent contractor—that was the worker’s ultimate classification. Put another way: In those cases where the control factor and opportunity factor aligned, had the courts hypothetically limited their analysis to just those two factors, it appears to the Department that the overall results would have been the same. And at 86 Fed. Reg. 1168 at 1206, the Preamble affirms that “The final rule takes into account facts and factors that have historically been part of the economic reality test, and decades of appellate decisions indicating that the two core factors frequently align with the ultimate determination of economic dependence or lack thereof.” Finally, at 86 Fed. Reg. 1168 at 1240, the Preamble states that “because the Department’s analysis of appellate case law since 1975 has found workers’ control and opportunity for profit or loss to be most predictive of a worker’s classification status, the finalized standard provides more accurate guidance.”
[13] 29 CFR 795.110.
[14] The Preamble expressed this intention at 86 Fed. Reg. 1168 at 1204, wherein DOL observed that “In many instances, the actual practices of the parties will establish the existence of an employment relationship despite what a ‘‘skillfully devised’’ contract might suggest on paper. Silk, 331 U.S. at 715; see, e.g., Scantland, 721 F.3d at 1313– 14 (‘‘Though plaintiffs’ ‘Independent Contractor Service Agreements’ provided that they could ‘decline any work assignments,’ plaintiffs testified that they could not reject a route or a work order within their route without threat of termination or being refused work in the following days.’’).”