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Final Rule: Independent Contractor Status under the Fair Labor Standards Act

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29 CFR Parts 780, 788, and 795

A final rule clarifying the standard for employee versus independent contractor status under the Fair Labor Standards Act (FLSA) was announced by the Department of Labor (Department) on January 6, 2021. The effective date of the final rule is March 8, 2021 and includes a multi-factor test for determining whether workers are independent contractors, meaning that the business they perform work for doesn’t have to pay minimum wage or overtime that the Fair Labor Standards Act requires for employees.

Clarifications in the final rule

  • Sets forth an “economic reality” test to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee.)
  • Identifies and explains two “core factors” that are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself:
    • The nature and degree of control over the work.
    • The worker’s opportunity for profit or loss based on initiative and/or investment.
  • Identifies three other factors that may serve as additional guideposts in the analysis, particularly when the two core factors do not point to the same classification. The factors are:
    • The amount of skill required for the work.
    • The degree of permanence of the working relationship between the worker and the potential employer.
    • Whether the work is part of an integrated unit of production.
  • Provides that the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
  • Provides six fact-specific examples applying the factors.

The final rule was published in the Federal Register on January 7, 2021.

Will the independent contractor status Rule be permanent? 

The rule clarifying independent contractor status is scheduled to become effective on March 8, 2021. However, a spokesperson for the Biden administration called out the rule as one that the administration is likely to revise in the days before its publication, bringing into question whether it will ever be permitted to take effect. In addition, independent contractor/employee status has been the topic of a great deal of litigation in recent years, so we can expect to see challenges should the rule is permitted to take effect.

Can Employers Require Workers to Become Vaccinated against Covid-19?

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The country’s first Covid vaccine could be authorized for emergency use as soon as today. If Pfizer gets the green light, distribution is set to begin next week.

Roughly six in ten Americans say they would get a vaccine, according to a recent survey by the Pew Research Center. Although this exceeds the figure from two months ago, to achieve herd immunity experts opine that about 70% of the population would need to be vaccinated or have antibodies. 

Under the law, an employer can generally require its workers to be vaccinated and can also fire an employee who refuses to do so. Some notable exceptions, however, exist to the general rule. For example, if a work force is unionized, the collective bargaining agreement may require negotiating with the union before an employer can implement a vaccine requirement.

Anti-discrimination laws also provide some protections to workers that are disabled. Under the Americans with Disabilities Act (the ADA), workers who do not want to be vaccinated for specific medical reasons are eligible to request an exemption. In this case, an employer may need to provide reasonable accommodation, such as allowing the employee to work remotely. 

Another exception exists under Title VII of the Civil Rights Act of 1964. Under Title VII, if taking the vaccine would conflict with a sincerely held religious belief, a worker may be able to opt out of a vaccine requirement.

The initial FDA approval is expected to be an “emergency use authorization,” as opposed to full approval. The law is unclear as to whether one can mandate vaccinations based on an emergency use authorization. As such, employers may need to wait until the FDA completes the entire approval process before putting vaccination requirement protocols in place. 

Uber and Lyft – Rideshare Companies or Technology Companies?

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In August, Uber and Lyft received a favorable employment law ruling from an appeals court that ruled to extend a stay on an order requiring them to reclassify their drivers as employees. The legal battle, however, is far from over.

The case was brought by California’s attorney general and city attorneys from San Francisco, Los Angeles and San Diego who allege that Uber and Lyft violated the state’s new labor law, Assembly Bill 5 (AB5), by misclassifying rideshare drivers as contractors.

Certain provisions contained in AB5 installed a three-pronged test for whether a worker should be considered independent or considered an employee. To be considered independent, workers must: (1) be “free from the control and direction of the hiring entity,” (2) do work “outside the usual course of the hiring entity’s business,” and (3) be “customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”

Uber and Lyft have not only argued that that their drivers meet the criteria to be independent contractors, but have also have asserted that the law didn’t apply to them because they are technology companies, not transportation companies, and that drivers are not a core part of their business.

Prior to the stay, the trial court granted the state a preliminary injunction that would require Uber and Lyft to reclassify their drivers as employees beginning Aug. 21. The companies argued that they would have to temporarily shut down in California in order to rework their businesses to comply with the injunction and rehire workers as employees, further stating that they would likely have to slash the number of workers they could employ once they returned, create more rigid work schedules for drivers and raise prices for riders. According to California officials, nothing in AB5 requires Uber and Lyft to eliminate flexible work for drivers, but the companies argue that it would be logistically implausible to do otherwise.

As of now, Uber and Lyft plan to remain operating under the same system that they have historically used while they continue to litigate in court. Even if and Uber and Lyft do not prevail in their court battle, they may have a second bite at the apple through Proposition 22, which will appear on the California ballot in November. Uber and Lyft have each contributed $30 million in funding to promote Prop 22, which would exempt their companies from compliance with AB5. In other words, if Prop 22 passes, it could render any adverse rulings meaningless as Prop 22 carves out obligations of app-based rideshare and food delivery services required under AB5.

U.S. Department of Labor Proposes Rule to Clarify Employee and Independent Contractor Status Under the Fair Labor Standards Act

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On September 22, 2020, the U.S. Department of Labor (DOL) announced a proposed rule clarifying the definition of employee under the Fair Labor Standards Act (FLSA) as it relates to independent contractors.

“The Department’s proposal aims to bring clarity and consistency to the determination of who’s an independent contractor under the Fair Labor Standards Act,” said Secretary of Labor Eugene Scalia. “Once finalized, it will make it easier to identify employees covered by the Act, while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.” 

The DOL’s proposed rule, however, has been sharply criticized as being a more employer friendly interpretation of employee status under the Fair Labor Standards Act than the DOL applied during the Obama administration.

The Department’s proposed rule would:

  • Adopt an “economic reality” test to determine a worker’s status as an FLSA employee or an independent contractor. The test considers whether a worker is in business for himself or herself (independent contractor) or is economically dependent on a putative employer for work (employee);
  • Identify and explain two “core factors,” specifically the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on initiative and/or investment. These factors help determine if a worker is economically dependent on someone else’s business or is in business for himself or herself;
  • Identify three other factors that may serve as additional guideposts in the analysis: the amount of skill required for the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work is part of an integrated unit of production; and
  • Advise that the actual practice is more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.

The agency proposed giving greater weight to two factors as determinative of status: (1) the nature and degree of the employer’s control over the work and (2) the worker’s opportunity for profit or loss based on personal initiative or investment. The proposed rule contemplates three additional “guideposts,” which would be useful in the analysis when the initial two factors are conflicting, according to a senior DOL official on a media call. The additional criteria are the amount of skill required in the work, the degree of permanence in the work relationship, and whether the work is part of an integrated unit of production.

This Notice of Proposed Rulemaking (NPRM) is available for review and public comment for 30 days after it is published in the Federal Register, which is significantly shorter than the more typical 60 or 90 day period for the public to weigh-in, indicating  that the administration is fast-tracking the rule change. 

A senior DOL official on the press call acknowledged that federal judges may opt not to give deference to this rule, once finalized, adding, “We do believe that the way we have articulated it is going to be highly persuasive to courts and to businesses and to individuals who want to be independent contractors across the country.”

Unions and Democrats generally favor the contrary approach of expanding employee status, contending that workers are often misclassified as independent contractors, which allows companies to dictate workers’ economic conditions while denying them benefits and basic workplace protections. 

Employees Working Remotely May Be Entitled to Overtime

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overtime during COVID-19

Employees working remotely may be entitled to overtime. When state and local governments began issuing stay-at-home orders in response to the COVID-19 pandemic, many employees suddenly found themselves working from home. This change in practice has increased the likelihood that employees will be working overtime. In many instances, employees working remotely will have access to technology or be taking on new responsibilities that they didn’t have when they worked primarily from their offices.

Basic overtime regulations

The federal Fair Labor Standards Act (FLSA) governs overtime pay and record keeping for part-time and full-time workers in the private and public sectors. The FLSA divides employees into two categories. Nonexempt employees are generally paid hourly and are entitled to overtime pay at one and one-half times their regular rate of pay beyond a 40-hour workweek. Employees are exempt from minimum wage and overtime pay requirements if they work in certain executive, administrative, professional and outside sales positions. Exempt employees are generally salaried and not entitled to overtime pay. However, they must be paid the same amount per pay period, regardless of how many hours they work. That is, they must be paid the same even if they work more or less than 40 hours.

“Off the Clock” work may result in overtime

Recent guidance from the Department of Labor notes that employers may encourage or require employees to work from home to control the spread of COVID-19. Employers, however, are not required to have telework programs in place. Working remotely does not change the federal wage-and-hour laws; they apply the same to employees working from home. And the same overtime laws still apply to employees working from home.

With large numbers of nonexempt employees working remotely, employers may have difficulty monitoring the number of hours the employees are actually working. And many employers may be unable to use the same compliance measures they used in the workplace to monitor the hours worked by their employees. Without such measures, it’s easy to see how employees could end up working longer than a normal eight-hour workday. Typical off-the-clock tasks such as reading and responding to emails, text messages and phone calls or conducting “a few minutes of research” can add up over the course of a week and lead to a claim for unpaid overtime wages.

While working from home may cut down on the time employees lose to commuting, it may also increase the chances that employees working remotely feel compelled to work overtime. As such, any employers should take reasonable steps to ensure that its nonexempt workers are being paid overtime for each hour its remote workers are performing, including any “off-the-clock” work performed on mobile phones or tablets.