Department of Labor Withdraws Employer-friendly FLSA Test for "Employee" Classification

ABSTRACT: Employee or independent contractor? Despite imperfections, the economic reality test remains the standard to determine whether a worker is classified as an "employee" entitled to Fair Labor Standards Act benefits and protections.

On May 6, 2021, the U.S. Department of Labor withdrew the new Trump-era Fair Labor Standards Act independent contractor rule, scheduled to take effect the next day.

The rule, entitled “Independent Contractor Status under the Fair Labor Standards Act” (ICR), was a decided shift to a narrower definition of “employee” and thereby narrowed the scope of workers who may be entitled to FLSA protections.

The FLSA was the first federal law to afford employees a right to a minimum wage and overtime pay, among other benefits.  The condensed statutory definition of “employee” is any individual who is permitted to work by an employer.  See 29 U.S.C. § 203 (2019).  As the Supreme Court interpreted the FLSA, it became clear that the sweepingly broad language of the Act’s “employee” definition required that employers delineate between “employees” and “independent contractors” lest the FLSA be misinterpreted “to stamp all persons as employees.”  See Walling v. Portland Terminal Co., 330 U.S. 148, 152 (1947).  Whether a worker is classified as an “employee” – and therefore is entitled to FLSA protections – or, alternatively, as an “independent contractor” has been a costly question steeped in debate ever since.  

Evolving common law and DOL guidance, via Wage and Hour Division opinion letters, are the tools employers have to decipher who is and who is not an “employee” for purposes of meeting FLSA standards.  Employers are often motivated to classify workers as “independent contractors” to avoid the need to meet FLSA requirements for minimum wages and overtime pay, for example.  For the same reasons, workers often prefer to be classified as “employees.”  Which begs the question, why is a worker’s classification up for debate?  The answer is because every analysis that common law or the DOL provide amounts to a non-exhaustive list of factors, each bearing indeterminate and malleable weight that exposes the factors to legitimate disputes.  The Supreme Court and federal courts of appeals are clear, however, on one point: no single factor is dispositive of a conclusion for or against a classification of “employee,” and a totality of the circumstances must be considered. 

Over the years, the most commonly applied multifactorial test has been the Economic Reality Test (ERT), a version of which is published by the DOL on the FLSA Fact Sheet (left column below).  The would-have-been new test, ICR, modified the ERT (middle and right columns below).

Both tests were designed to pinpoint workers who are economically dependent on a potential employer for work.  However, unlike the ERT, the ICR would have mandated that two “core” factors – nature and degree of control, and worker’s opportunity for profit or loss – take priority, without analysis of the other factors or the totality of the circumstances.  By doing so, the ICR necessarily would have narrowed the scope of workers who may have been deemed “employees” covered by the FLSA umbrella. 
 

While advocates of ICR touted that the rule could provide more certainty and predictability for employers and workers alike, the totality of the circumstances approach of the ERT will remain the federal standard, applying multiple factors to any determination of employee versus independent contractor status.