The world of worker classification is constantly evolving and bringing new challenges and opportunities for both businesses and workers. As the legal landscape shifts, it's crucial to stay informed about the latest changes to better understand their implications for yourself or for your business. Particularly, in the last few years due to the changing presidential administrations, the classification of workers as employees or independent contractors has undergone several significant changes.
One significant change took place this year when the Department of Labor (“DOL”) replaced the 2020 analysis for independent contractor versus employee classification by re-establishing the totality-of-the-circumstances analysis, which had previously been utilized since the 1940s. Similarly, another important shift regarding independent contractor classification occurred in 2023, when the National Labor Relations Board (“NLRB”) reverted to the pre-2019 common law standard for analyzing independent contractors versus employees. Let’s take a deeper look into the recent developments and their impact on both workers and employers.
Historically, to determine whether a worker was an employee or an independent contractor the DOL conducted a “totality-of-the-circumstances” analysis considering six factors in assessing the economic reality of the whole activity, with no factor having predetermined weight under the Fair Labor Standards Act (“FLSA”). The six factors are: (1) the opportunity for profit or loss; (2) investment; (3) permanency; (4) control; (5) whether the work is an integral part of the employer’s business; and (6) skill and initiative. The central focus of this analysis is on the “economic realities” of the worker’s situation. Under this test, the worker is an employee if they are economically dependent on the employer for work. In contrast, if the worker is in business for themselves then they are an independent contractor.
The Trump Administration attempted to simplify the longstanding “economic realities” analysis and to prioritize entrepreneurial opportunity with the 2021 Independent Contractor Rule (the “2021 IC Rule”). Under this test, many workers were deemed independent contractors compared to the previous “economic realities” standard. The 2021 Rule only focused on two core factors in classifying a worker as an independent contractor or employee: (1) the nature and degree of the individual’s control over the work; and (2) the individual’s opportunity for profit or loss.
However, in 2022, the DOL issued a “proposed rule” to return to the totality-of-the-circumstances interpretation of the economic realities test to increase consistency, to reduce misclassification, to provide a more consistent analysis under the judicial precedent, and to better reflect the FLSA’s text and purpose. According to the DOL, “the 2021 IC Rule does not fully comport with the FLSA's text and purpose as interpreted by the courts and, had it been left in place, would have had a confusing and disruptive effect on workers and businesses alike due to its departure from decades of case law describing and applying the multifactor economic reality test.”
Therefore, the DOL ultimately considered more than 55,000 public comments before releasing the final rule (the “2024 Rule”) on January 9, 2024. On March 11, 2024, the 2024 Rule took effect and formally rescinded the 2021 IC Rule. The 2024 Rule returns to the totality-of-the-circumstances multifactor economic realities standard that was in place prior to the 2021 IC Rule.
The DOL believes that the 2024 Rule is more aligned with the evolving economy and will therefore be more beneficial to both workers and employers. The 2024 Rule is aimed to ensure workers who are classified as employees are paid properly in terms of minimum wage and overtime pay in addition to receiving other protections that they are legally entitled to. Furthermore, a goal of the 2024 Rule is to ensure that responsible employers who comply with the law are not placed at a competitive disadvantage compared to employers who misclassify employees.
Importantly, the DOL has indicated that the Department will be enforcing harsher penalties against companies that misclassify employees. Companies must ensure they are in compliance to avoid these significant fines, additional taxes, back pay, and other amounts.
The National Labor Relations Board (“NLRB”) has also shifted away from the precedent established under the Trump administration. In 2023, the NLRB opted towards a more “employee-friendly” standard for classifying workers, just like the DOL. In The Atlanta Opera, Inc., the Board’s decision reverted back to the stricter, pre-2019, independent contractor standard. This ruling is a restoration of the common-law factors, thereby returning to the framework set forth in FedEx Home Delivery, 361 NLRB 610 (2014) and overruling the standard articulated in SuperShuttle DFW, Inc., 367 NLRB No. 75 (2019). Under this stricter common law test, more workers are deemed employees, making them eligible for various additional protections.
The key difference between the two approaches is how the Board analyzes entrepreneurial opportunity. Under the 2019 SuperShuttle standard the Board emphasized entrepreneurial opportunity as the prism through which the common law factors should be considered. In contrast, under the FedEx standard entrepreneurial opportunity is simply one factual consideration.
The current common law analysis is a qualitative determination where factors are assessed and weighed to determine a particular case, with no one factor being decisive. A non-exhaustive list of common law factors from the Restatement (Second) of Agency § 220 (1958) are as follows:
The recent changes in worker classification standards have substantial implications for businesses. At Plakas Mannos, our experienced attorneys offer tailored advice and guidance to protect your business and ensure compliance with the latest regulations. Contact us today to discuss your case.