Workers Who Are Economically Dependent Entitled to Employee Protections Under Proposed Department of Labor Rule

Workers Who Are Economically Dependent Entitled to Employee Protections Under Proposed Department of Labor Rule

On Thursday, the U.S. Department of Labor will publish a proposed rule that should help gig-economy workers assert their rights as employees under the federal Fair Labor Standards Act (FLSA).  Under the rule, the Department will adopt a decades-old “economic reality” test to determine whether a worker is protected under FLSA: if a worker is economically dependent on their employer, that worker is an employee.  An employer should classify a worker as an independent contractor only if that worker is in business for themself.

Millions of Americans work on-demand as drivers, grocery shoppers, delivery people, and other workers through companies that classify them as independent contractors.  This arrangement is cheap for companies like Lyft, Uber, InstaCart, and DoorDash, but it can deprive their workers of federal protections like minimum wage, overtime, and employer recordkeeping.  When a worker is functioning as an employee, and their employer treats them as an independent contractor, that worker has been misclassified. As the Department explained, in announcing the rule, “[m]isclassification is a serious issue that denies workers’ rights and protections under federal labor standards, promotes wage theft, allows certain employers to gain an unfair advantage over law-abiding businesses, and hurts the economy at-large.”

In California, employer attempts to classify workers as independent contractors have been the subject of court decisions, legislative action, and the most disproportionately-funded ballot measure in the state’s history, Prop 22.  We at Bryan Schwartz Law, P.C. have blogged extensively about these matters, for example, here, here, here, and here.

The effort to address misclassification at the federal level is encouraging, especially in light of an attempt to strengthen the practice of classifying gig-economy workers as independent contractors by the Trump Administration.  That Administration promulgated a rule that purported to clarify what workers qualify as independent contractors.  The Trump-era rule encouraged employers to determine a worker’s status as an independent contractor based primarily on two considerations, (1) the nature and degree of control over the work and (2) the worker’s opportunity for profit or loss.  This focus would have exempted many gig-economy workers from employee protections.

The Trump-era rule was set to become effective March 8, 2021.  In early 2021, the Department of Labor published a notice of intended rulemaking to delay the effective date of the Trump-era rule; and then to withdraw that rule.  However, on March 14, 2021, a Republican-appointed federal district judge ruled in Coalition for Workforce Innovation v. Walsh that the Department had not complied with administrative procedure law.  E.D. Texas No. 1:21-cv-103, 2022 WL 1073346.  That court ordered that the Trump-era rule, focusing on two factors only, become law.  After that ruling, the Department developed the new proposed rule and initiated the formal rulemaking process.

In a departure from the Trump-era rule, the new proposed rule will focus on a worker’s economic reality beyond the two-factor test.  It will broaden the inquiry using standards developed by courts beginning in 1944 in a series of cases interpreting FLSA and other laws, including the National Labor Relations Act and Social Security Act.  Considering whether a worker qualified as an employee under the National Labor Relations Act, the Supreme Court held in 1944 that a worker’s status must be determined based on underlying economic facts.  NLRB v. Hearst Publications, 322 U.S. 111.  The Supreme Court then held that economic reality also determines a worker’s employee status under the Social Security Act in United States v. Silk, 331 U.S. 704 (1947), and under the FLSA in Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947).

Under the rule, whether a worker is economically dependent requires examining six factors (proposed 29 C.F.R. § 795.110(b)):

(1) The opportunity for profit or loss [to the employer] depending on a worker’s managerial skill.

This factor weighs in favor of finding a worker to be an employee when a worker’s managerial skill has little effect on the business’s profit or loss.

(2) Investments by the worker and employer.

Where a worker makes capital or entrepreneurial investments, that weighs in favor of finding independent contractor status; but the purchase of tools to do the work indicate employee status.  Further, the rule directs employers and workers to consider a worker’s investment relative to the employer’s investment.

(3) Degree of permanence of the work relationship.

This factor weighs in favor of finding employee status when the relationship between the worker and employer is continuous and indefinite in duration.  Project-based, non-exclusive work may weigh in favor of finding an independent contractor status.

(4) Nature and degree of control [by the employer] over the work.

Some of the sub-factors considered here are: whether the employer sets the worker’s schedule; and whether the employer limits the worker’s ability to work for others, either explicitly or by placing demands on the worker’s time that makes it difficult or impossible for them to work for others.

(5) Extent to which the work performed is integral the employer’s business.

If the work performed is not critical, necessary, or central to the business, this factor weighs in favor of independent contractor status. Examples would be a graphic designer for a law firm website, or a plumber doing plumbing work at a tech company. This factor is one of the key factors in California’s “ABC test,” which was discussed by Bryan Schwartz Law, P.C. in the blog post here.

(6) Skill and initiative.

Where a worker brings specialized skills to an employment relationship, it is less likely that they will be considered an employee.

The new proposed rule also allows the consideration of additional, unenumerated factors, if those factors help analyze the fundamental question: whether a worker is economically dependent on their employer.

The new proposed rule is an important step in stopping the exploitation of vulnerable workers, whose economic dependence on their employers entitles them to concomitant protections.

If you are a worker with questions about whether your employer has incorrectly classified you as an independent contractor, contact Bryan Schwartz Law, P.C.