DOL Releases Final Rule for Determining Independent Contractor Status under the FLSA

Today, the U.S. Department of Labor (DOL) finalized its regulation for determining employee or independent contractor status under the Fair Labor Standards Act (FLSA), the federal statute governing minimum wage and overtime pay. As signaled in DOL’s proposal, the final rule repeals and replaces a prior regulation put in place by DOL at the end of the Trump administration in favor of a less predictable framework that increases the likelihood of an employee determination. The regulation will be formally published in the Federal Register on January 10; its effective date is March 11. We anticipate business groups will file suit(s) challenging DOL’s authority to issue this regulation.

Although the final regulation and its Trump administration predecessor both embrace a multi-factor economic realities test to determine whether a worker is economically dependent on a putative employer for work, that is where their similarities end. As finalized, the rule considers six factors to determine whether independent contractor status is present. No single factor is determinative, rather, the DOL has adopted a totality of the circumstances analysis, and additional factors may be considered. The six factors are:

Opportunity for profit or loss based on managerial skill.
Investments by the worker and the potential employer.
Degree of permanence of the relationship.
Nature and degree of control.
Extent to which the work performed is an integral part of the potential employer’s business.
Skill and initiative.

As compared to the initial proposed rule, there were some incrementally positive changes in response to comments filed by commenters, including comments filed by Scopelitis, though not enough to make the final rule favorable on balance. Some notable positive changes in the final regulation include:

On the investment factor, costs borne by a worker for equipment to perform specific jobs are not deemed entrepreneurial and instead are indicative of employee status. However, in response to comments, the final rule recognizes leasing a truck to be able to provide truck driving services may be capital investment or entrepreneurial in nature, even if leased from a trucking company and not an independent third party.
Also on the investment factor, the regulation introduces a comparison of the worker’s investment relative to the putative employer’s investment in the business. In a change from the proposed rule, the final rule calls for comparing the investments in a qualitative manner (to consider the nature of the investment not merely its comparative cost) rather than solely using quantitative comparisons, pointing to a trucking example in the preamble.
On the control factor, the proposed rule originally provided that measures implemented by a putative employer to comply with legal obligations, safety standards, or contractual or customer requirements may be considered control indicative of employee status. The final rule includes a change so that actions taken for the sole purposes of compliance with a specific law or regulation are not indicative of control. However, actions beyond compliance with a specific law or regulation and those taken for the putative employer’s safety or quality control standards may be indicative of control.
In a potentially helpful addition, the final rule recognizes that a driver with a CDL has a specialized skill that, combined with business initiative, weighs toward independent contractor status under the skills and initiative factor.

A few other troubling aspects of the proposed rule remained largely unchanged, including:

On the control factor, a contractual right to control or supervise will be considered indicative of employee status, even if in practice that right is never exercised by the putative employer.
On the degree of permanence of the work relationship factor, exclusivity of a working relationship is considered indicative of employee status under this factor as well as under the control factor.

From enactment of the FLSA in 1938 until January 2020, DOL had not issued a regulation on this matter. After issuing a regulation in 2020, DOL abruptly changed its view with a change in control of the White House. Given increased judicial wariness of deference to agency interpretations, it is unclear how the regulation will impact private litigation should it survive anticipated legal challenges.

The Firm will vigilantly track developments and provide updates as appropriate. In the meantime, feel free to contact Greg Feary, Jim Hanson, Shannon Cohen, or Prasad Sharma with any questions.