A proposed change in how the U.S. Department of Labor decides if a worker is an employee or independent contractor is back, at least for now. A federal judge recently ruled that the Labor Department violated federal rules of administrative procedure when it tried to withdraw the rule change following the change in presidents in 2021.
This development could affect how businesses in Southern California hire and classify their workforces.
The economic realities test
The Fair Labor Standards Act (FLSA) directs the Labor Department to apply a test called the “economic realities” test to determine who is an employee who is owed certain protections and compensation by their employer and who is an independent contractor “in business for himself or herself.” Courts typically look at six factors:
- The nature and degree of control the business has over the worker
- The worker’s opportunity for profit or loss
- The worker’s investment in the business
- The permanence of the working relationship
- The degree of skill needed to perform the work duties
- How much the work is an integral part of the company’s business
While courts have traditionally weighed each factor about equally, in 2020, the Labor Department published a proposed change. Under the proposed rule, the first two factors on the above list would receive more weight than the rest. This would appear to effectively narrow the definition of employee under federal law. Potentially, employers would not have to provide benefits or as many safety protections for many workers currently classified as employees. The cost savings could be significant.
Ruling on procedural grounds
The rule was supposed to go into effect on March 8, 2021. But shortly after the Biden administration began that January, it delayed the start date and later withdrew it entirely. An advocacy group sued, and a federal judge ruled against the Labor Department on procedural grounds.
The fact that the ruling did not address the rule’s substance or the policy change could mean that the Labor Department could try to change it back through other means. But for now, at least, control over the worker and the worker’s opportunity for profit and loss will be the most important factors under the FLSA.