The Classification of Workers as Employees or Independent Contractors

By Casey Seaman, Staff Writer

The classification of a worker as an independent contractor versus an employee has been one of contention for decades. The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, record keeping, and child labor standards affecting full-time and part-time workers in both the private sector and in federal, state, and local governments.^[1] However, there are some exceptions to the protections of the FLSA, such as independent contractors, who are not afforded the same protections as employees.^[2] As a result, there have been debates regarding the classification of workers as independent contractors versus employees.

In attempting to solve these issues, the Department of Labor and the courts ultimately decided to implement an economic reality test.^[3] This test stated that the ultimate inquiry was whether as an economic reality, the worker is either economically dependent on the employer for work and is thus an employee, or is in the business for themselves and therefore an independent contractor.^[4] To answer this question, courts have historically conducted a totality of circumstances analysis where they considered multiple factors including the opportunity for profit or loss, investment, permanency, the degree of control by the employer over the worker, whether the work is an integral part of the employer’s business, and skill and initiative.^[5]

However, in January 2021, the Department of Labor published the “2021 IC Rule.” Within this rule, the department identified five economic reality factors to guide the inquiry into whether a worker is an independent contractor or an employee.^[6] Among these factors, two were identified as core factors, nature and degree of control over the work and a worker’s opportunity for profit and loss.^[7] Under the 2021 IC Rule, if these two factors point to the same classification, then there is a substantial likelihood that it is the worker’s accurate classification.^[8] The 2021 IC rule also identified three less probative factors which include the amount of skill required for the work, the degree of permanence of the working relationship between worker and employer, and whether the work is part of an integrated unit of production.^[9] Under the 2021 IC rule, it is highly unlikely that these three non-core factors can outweigh the combined probative value of the other two factors.^[10]

However, after further consideration, the Department of Labor now believes that the 2021 IC Rule does not fully comport with the FLSA’s purpose. The department believes that straying from the longstanding test applied by the courts may have a confusing and disruptive effect on workers and ultimately create greater confusion among employers in applying the new analysis.^[11] As such, the department believes that it is appropriate to rescind the 2021 IC rule and set forth an analysis for determining status under the act that is more consistent with judicial precedent and the goals of the FLSA.^[12]This analysis ultimately proposes a return to the totality of the circumstances analysis.

This new proposal has also been subject to criticism, especially from the business ventures that are most likely to be affected. The initial analysis by economic analysts was nearly universally negative for businesses and hinted at a gloomy forecast for the stability of the “gig economy model.”^[13] However, the changes have not been nearly as sweeping as many in the industry were anticipating.^[14]

In a news release, Uber’s Head of Federal Affairs commented that “the proposed rule takes a measured approach, essentially returning us to the Obama era, during which our industry grew exponentially.” Uber’s Head of Federal Affairs also stated “in a time of deep economic uncertainty, it’s crucial that the Biden administration continues to hear from the more than 50 million people who have found an earning opportunity with companies like ours.”^[15] Lyft also commented that the proposal would not force the company to alter its business model.^[16] Though there is no way to predict the exact effects of the new proposal, the department hopes it will protect workers from misclassification while also recognizing that independent contractors serve an important role in our economy.^[17]

^[1] https://www.dol.gov/agencies/whd/compliance-assistance/handy-reference-guide-flsa

^[2] https://www.federalregister.gov/documents/2022/10/13/2022-21454/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act

^[3] Id.

^[4] Id.

^[5] Id.

^[6] Id.

^[7] https://www.federalregister.gov/documents/2022/10/13/2022-21454/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act

^[8] Id.

^[9] Id.

^[10] Id.

^[11] Id.

^[12] https://www.federalregister.gov/documents/2022/10/13/2022-21454/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act