On January 10, 2024, the U.S. Department of Labor issued its new rules on how to properly classify workers as either employees or independent contractors under the Fair Labor Standards Act. The new rules are slated to go into effect on March 11, 2024, and reinstate the so-called “economic realities” test for determining whether a worker is in fact in business for himself. According to DOL, the new rules “will help to ensure that workers who are employees are paid the minimum wage and overtime due to them, and that responsible employers that comply with the law are not placed at a competitive disadvantage when competing against employers that misclassify employees.”
The new rules replace what is widely viewed as a more employer-friendly test adopted by the Trump Administration’s DOL in its waning days in January 2021. The Biden Administration suspended and then withdrew the Trump DOL’s test in the Spring of 2021 (see Blog # 97), but a federal lawsuit challenging that action ultimately succeeded in vacating the suspension and withdrawal. Coalition for Workforce Innovation v. Walsh, 2022 WL 1073346 (E.D. Tex. Mar. 14, 2022). A recent detour to the Fifth Circuit Court of Appeals vacated that decision in light of the new rule, but also remanded the case to determine whether the 2024 rule itself complies with the requirements of the Administrative Procedure Act (as the plaintiffs now claim). There are several other lawsuits challenging the new rule in other courts. As of this writing no court has issued an injunction postponing the March 11 effective date.
Under the “economic realities” analysis, six factors are considered:
(1) the worker’s opportunity for profit or loss depending on managerial skill. (This factor primarily looks at whether a worker can earn profits or suffer losses through their own independent effort and decision making.)
(2) investments by the worker and the potential employer. (This factor primarily looks at whether the worker makes investments that are capital or entrepreneurial in nature.)
(3) the degree of permanence of the work relationship. (This factor primarily looks at the nature and length of the work relationship.)
(4) the nature and degree of control. (This factor primarily looks at the level of control the potential employer has over the performance of the work and the economic aspects of the working relationship.)
(5) the extent to which the work performed is an integral part of the potential employer’s business. (This factor primarily looks at whether the work is critical, necessary, or central to the potential employer’s principal business, which indicates employee status.)
(6) the worker’s required skill and initiative. (This factor primarily looks at whether workers use their own specialized skills together with business planning and effort to perform the work and support or grow a business.)
The DOL has admonished that “no one factor or subset of factors is necessarily dispositive, and the weight to give each factor may depend on the facts and circumstances of the particular relationship. Moreover, these six factors are not exhaustive.” Under the 2021 rule, the first and fourth factors, opportunity for profit or loss and the nature and degree of control over the worker, predominated as “core” factors, and if they pointed toward independent contractor status other factors would be unlikely to overcome that determination.
It is easy to see why the construction industry prefers the 2021 approach. The fifth factor – the extent to which the work performed is an integral part of the potential employer’s business – may make it difficult for general contractors to treat roofers, drywallers and other non-licensed trades as anything but employees. The third factor – the degree of permanence of the work relationship – adds to that difficulty whenever, as is commonly the case, a general contractor uses the same “subs” over and over again for multiple projects.
If it survives litigation challenges, the new rule will determine a worker’s status for purposes of the Fair Labor Standards Act, but not for any other federal or state statute. There continues to be a patchwork of tests to determine employment status for purposes of different laws, and under the common law of liability for another’s negligence.
The new rules replace what is widely viewed as a more employer-friendly test adopted by the Trump Administration’s DOL in its waning days in January 2021. The Biden Administration suspended and then withdrew the Trump DOL’s test in the Spring of 2021 (see Blog # 97), but a federal lawsuit challenging that action ultimately succeeded in vacating the suspension and withdrawal. Coalition for Workforce Innovation v. Walsh, 2022 WL 1073346 (E.D. Tex. Mar. 14, 2022). A recent detour to the Fifth Circuit Court of Appeals vacated that decision in light of the new rule, but also remanded the case to determine whether the 2024 rule itself complies with the requirements of the Administrative Procedure Act (as the plaintiffs now claim). There are several other lawsuits challenging the new rule in other courts. As of this writing no court has issued an injunction postponing the March 11 effective date.
Under the “economic realities” analysis, six factors are considered:
(1) the worker’s opportunity for profit or loss depending on managerial skill. (This factor primarily looks at whether a worker can earn profits or suffer losses through their own independent effort and decision making.)
(2) investments by the worker and the potential employer. (This factor primarily looks at whether the worker makes investments that are capital or entrepreneurial in nature.)
(3) the degree of permanence of the work relationship. (This factor primarily looks at the nature and length of the work relationship.)
(4) the nature and degree of control. (This factor primarily looks at the level of control the potential employer has over the performance of the work and the economic aspects of the working relationship.)
(5) the extent to which the work performed is an integral part of the potential employer’s business. (This factor primarily looks at whether the work is critical, necessary, or central to the potential employer’s principal business, which indicates employee status.)
(6) the worker’s required skill and initiative. (This factor primarily looks at whether workers use their own specialized skills together with business planning and effort to perform the work and support or grow a business.)
The DOL has admonished that “no one factor or subset of factors is necessarily dispositive, and the weight to give each factor may depend on the facts and circumstances of the particular relationship. Moreover, these six factors are not exhaustive.” Under the 2021 rule, the first and fourth factors, opportunity for profit or loss and the nature and degree of control over the worker, predominated as “core” factors, and if they pointed toward independent contractor status other factors would be unlikely to overcome that determination.
It is easy to see why the construction industry prefers the 2021 approach. The fifth factor – the extent to which the work performed is an integral part of the potential employer’s business – may make it difficult for general contractors to treat roofers, drywallers and other non-licensed trades as anything but employees. The third factor – the degree of permanence of the work relationship – adds to that difficulty whenever, as is commonly the case, a general contractor uses the same “subs” over and over again for multiple projects.
If it survives litigation challenges, the new rule will determine a worker’s status for purposes of the Fair Labor Standards Act, but not for any other federal or state statute. There continues to be a patchwork of tests to determine employment status for purposes of different laws, and under the common law of liability for another’s negligence.
RSS Feed
