Unpacking The Department of Labor’s “New” Economic Realities Test: A Side-By-Side Comparison with the 2021 Independent Contractor Rule

Blog Post | 112 KY. L. J. ONLINE | February 7, 2024

Unpacking The Department of Labor’s “New” Economic Realities Test: A Side-By-Side Comparison with the 2021 Independent Contractor Rule

By: Carmella M. Palladino, Staff Editor, Vol. 112 

On January 9, 2024, the same day the U.S. Department of Labor (“DOL”) published the Final Rule for Employee or Independent Contractor Classification under the Fair Labor Standards Act (“FLSA”),[1] the DOL’s Wage and Hour Division announced their recovery of over $127,000 in wages from Lucero Aerospace Staffing Solutions, LLC for misclassifying workers as independent contractors.[2] The aviation maintenance workers were paid “straight-time rates for all hours” and were not paid the “half-time rate required” for overtime.[3] Investigators further reported that the Alabama staffing agency also violated the FLSA by failing to pay at least one worker minimum wage.[4]

Improper classification of worker status does not only deprive employees like the Lucero Aerospace mechanics of their full wages.[5] When an employer fails to make a proper classification, workers are also denied other benefits and protections, such as social security contributions, unemployment and workers’ compensation, family and medical leave, and workplace protections from discrimination.[6] Further, misclassification cheats all taxpayers, and “generates substantial losses” to the U.S. economy.”[7] This blog analyzes the new classification rule in comparison to the “Trump-era rule,”[8] and argues that the DOL’s decision to return to the “Economic Realities” test that federal appellate courts already apply[9] will produce a more accurate worker classification for purposes of the FLSA. 

II.  2021 INDEPENDENT CONTRACTOR RULE AND THE “ECONOMIC REALITIES” TEST 

A.  2021 INDEPENDENT CONTRACTOR RULE

Before it was replaced, the 2021 Independent Contractor Rule (“IC Rule”) “marked a departure from judicial precedent and DOL interpretive guidance.”[10] It did not apply the longstanding “multifactor, totality-of-the-circumstances analysis” of worker status. Instead, it identified five factors but emphasized the following two “core” considerations: “(1) the nature and degree of the worker’s control over the work and (2) the worker’s opportunity for profit or loss.”[11] The end result? A rule that narrowed the DOL’s interpretation of “employee” under the FLSA, which made it easier for employers to classify workers as independent contractors, rather than employees entitled to FLSA protections.[12]

B.  “ECONOMIC REALITIES” TEST

The 2021 Rule was replaced with the “Economic Realities” test, a six-factor, totality-of-the-circumstances analysis the DOL describes as “more consistent with judicial precedent” and the “text and purpose” of the FLSA.[13] The factors include: (1) the opportunity for profit or loss, (2) investments by the worker and the potential employee, (3) the degree of permanence of the work relationship, (4) the nature and degree of control, (5) whether the work is an integral part of the employer’s business, and (6) the workers’ skill and initiative.[14] No one factor of the “Economic Realities” test is dispositive.[15]

C.  DISCUSSION

Reactions to the DOL’s return to the “Economic Realities” test are varied, especially between “pro-worker” and “pro-business” advocates.[16] Proponent National Employment Law Project (“NELP”) issued a statement celebrating the DOL’s decision to replace the 2021 IC Rule that applied a narrow interpretation of the FLSA.[17] In particular, the director noted that the Final Rule is a more effective way to address misclassification because its flexible approach is applicable to the various “work relationships that exist today,” such as when an agent or technology is used to manage their activities.”[18]

In contrast, the U.S. Chamber of Commerce recently claimed the DOL’s Final Rule is biased towards classifying a worker as an employee.[19] They argue that the 2021 IC Rule’s emphasis on control and opportunity for profit and loss would have provided employers and workers with much-needed clarification and freedom.[20] In addition, they point to the Wage and Hour Division’s success[21] in “cracking down on bad actors” as evidence that the Final Rule is “completely unnecessary.”[22]

III.  CONCLUSION

As you can see, the two factors that the 2021 Rule emphasized also appear in the DOL’s Final Rule. Applying equal weight to control and opportunity for profit or loss will lead to a more accurate result regarding the inquiry of whether a worker is an employee or an independent contractor, which will directly address the issue of intentional misclassification. As for the concern for a clear, easily applicable standard that allows workers “freedom to choose how they work,”[23] the DOL has made assurances that this Rule will not affect those who are truly in business for themselves.[24]

Lastly, while it is true that despite “historically low staffing levels,” the Wage and Hour Division has had great success recovering workers’ hard-earned wages,[25] if anything FLSA violation discoveries like the misclassified Lucero Aerospace maintenance workers are proof that there needs to be more effective prevention of wage theft from intentional misclassification on the front end, and the “Economic Realities” test provides a better solution for this than the 2021 Rule.

[1] Jake Andrejat, US Department of Labor Announces Final Rule On Classifying Workers As Employees Or Independent Contractors Under The Fair Labor Standards Act, U.S. Dep’t of Labor,  (Jan. 9, 2024), https://www.dol.gov/newsroom/releases/whd/whd20240109-1.

[2] Erika Ruthman & Eric R. Lucero, US Department of Labor Recovers 127k In Back Wages, Damages For 26 Maintenance Workers Denied Overtime By Dothan Employer, U.S. Dep’t of Labor (Jan. 9, 2024), https://www.dol.gov/newsroom/releases/whd/whd20240109.

[3] Id.

[4] Id.

[5] Id.

[6] See  Andreiat, supra note 1; Jessica Looman, The True Cost of Misclassification, US Dep’t of Labor Blog (May 6, 2021), https://blog.dol.gov/2021/05/06/the-true-cost-of-misclassification.

[7] Jessica Looman, The True Cost of Misclassification, US Dep’t of Labor Blog (May 6, 2021), https://blog.dol.gov/2021/05/06/the-true-cost-of-misclassification.

[8] Max Kutner, DOL’s Contractor Rule Divides Employment Law World, Law360: Employment Authority, (Jan. 9, 2024), https://www.law360.com/employment-authority/wage-hour/articles/1783968/dol-s-contractor-rule-divides-employment-law-world.

[9] Employees or Independent Contractor Classifications Under the Fair Labor Standards Act, 89 Fed. Reg. 1638, 1642 (Jan. 10, 2024) (to be codified at 29 C.F.R. Parts 780, 788, and 795).

[10] Karen O’Connor & Emily Atmore, ‘Economic Realities’ Test Adds Promise to DOL Gig Workers Rule, Bloomberg Law: U.S. Law Week, (Jan. 18, 2024), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/us-law-week/XJQB2LS000000?bc=W1siU2VhcmNoICYgQnJvd3NlIiwiaHR0cHM6Ly93d3cuYmxvb21iZXJnbGF3LmNvbS9wcm9kdWN0L2JsYXcvc2VhcmNoL3Jlc3VsdHMvMzUxNjg4Zjg4ODM1OTBlNGI5ZGZhMjhjZDA2ODdhNjAiXV0--b233c137295de60c1695fffc7aa5c9f9427456e2&bna_news_filter=us-law-week&criteria_id=351688f8883590e4b9dfa28cd0687a60; see also 89 Fed. Reg. at 1638.

[11] Independent Contractor Status Under the Fair Labor Standards Act, 86 Fed. Reg. 1168 (Jan. 7, 2021).

[12] See O’Connor & Atmore, supra note 10.

[13] Employees or Independent Contractor Classifications Under the Fair Labor Standards Act, 89 Fed. Reg. 1638, 1638-40 (Jan. 10, 2024) (to be codified at 29 C.F.R. Parts 780, 788, and 795).

[14] Id. at 1638.

[15] Id.; Looman, supra note 6.

[16] See Chris Marr & Rebecca Rainey, Labor Department Cements Rule Change on Gig Worker Status (1), Bloomberg Tax Report: Daily Tax Report, (Jan. 9, 2024), https://www.bloomberglaw.com/product/tax/bloombergtaxnews/daily-tax-report/BNA%200000018afc40db9dafaffdf3313c0001?bna_news_filter=daily-tax-report.

[17] On the U.S. Department of Labor’s Rule on How it Determines Independent Contractor or Employee Status Under the Fair Labor Standards Act, Nelp.org, (Jan 9. 2024), https://www.nelp.org/news-releases/on-the-u-s-department-of-labors-rule-on-how-it-determines-independent-contractor-or-employee-status-under-the-fair-labor-standards-act/.

[18] See id.

[19] Marc Freedman, U.S. Chamber Opposes Harmful New DOL Regulation on Employee and Independent Contractor Classification, U.S. Chamber of Com., (Jan 9. 2024), https://www.uschamber.com/employment-law/u-s-chamber-opposes-harmful-new-dol-regulation-on-employee-and-independent-contractor-classification.

[20] See Chris Marr, Business Groups Seek to Block DOL’s Gig Worker Status Rule (1), Bloomberg Tax News: Daily Tax Report, (Jan. 12, 2024), https://www.bloomberglaw.com/product/tax/bloombergtaxnews/daily-tax-report/X67JLT4K000000?#jcite.

[21] See Jessica Looman, Big Results for Workers in 2023, U.S. Dep’t of Labor Blog, (Dec. 7, 2023), https://blog.dol.gov/2023/12/07/big-results-for-workers-in-2023.

[22] Freedman, supra note 19.

[23] Marr, supra note 20.

[24] Looman, supra note 6.

[25] Looman, supra note 21.