Classifying a worker as an independent contractor rather than an employee can be one of the more complicated—and risky—decisions an employer can make, as misclassification can lead to serious legal and financial consequences. Once again, however, the proper standard for classifying a worker under the Fair Labor Standards Act ("FLSA") is in flux. As this blog post previously covered, the standard for determining whether a worker is an independent contractor or an employee has been the subject of ongoing shifts between recent presidential administrations.
Historically, classification under the FLSA was determined using the economic realities test—an analysis of six equally weighted factors. Under this test, the Department of Labor analyzes:
- The extent to which the work performed is an integral part of the employer's business;
- The worker's opportunity for profit or loss depending on their managerial skill;
- The extent of the relative investments of the employer and the worker;
- Whether the work performed requires special skills and initiative;
- The permanency of the relationship; and
- The degree of control exercised or retained by the employer.
As might be expected, a balancing test of six equal factors created uncertainty for employers. In response, during the first Trump Administration, the Department issued the 2021 Independent Contractor Rule (2021 IC Rule), which—while still rooted in the economic realities test—emphasized two "core" factors as most probative: (1) the nature and degree of the worker's control over the work, and (2) the worker's opportunity for profit or loss. These core factors were given greater weight in the Department's analysis.
The Biden Administration opposed the 2021 IC Rule and, in March 2024, enacted a new rule that eliminated the 2021 framework and restored the historical economic realities test, with each factor once again weighed equally. Now, with President Trump back in office, the Department of Labor is seeking to re-implement the 2021 IC Rule—at least in spirit. In a Field Assistance Bulletin released last week, the Department announced that it will no longer apply the Biden Administration's 2024 Rule in its FLSA investigations when determining whether a worker is an employee or an independent contractor.
Critically, the Field Assistance Bulletin does not overturn the 2024 Rule; such an action would require the Department to undergo the formal rulemaking process. However, that process may not be necessary. Several lawsuits have been filed challenging the 2024 Rule, and it could ultimately be struck down by judicial action. The Department has indicated in court that it is reconsidering the 2024 Rule. As such, while the bulletin signals a shift in how the Department will conduct its enforcement, the 2024 Rule remains in effect for purposes of private litigation until it is formally withdrawn or invalidated by the courts.
For employers, this development underscores the risks of relying on standards that can change from one administration to the next—and that may also vary depending on which agency is reviewing the issue, whether it's the Department of Labor, the IRS, or a state workers' compensation board. Employers wishing to engage independent contractors should structure those relationships to clearly support proper classification. Regular reviews of contractor agreements, along with audits to ensure that the working relationship continues to align with the intended classification, are critical steps to avoid inadvertent misclassification.
If you have questions about how these shifting standards may impact your business, our team is here to help. KMK's Labor and Employment attorneys regularly assist employers with worker classification audits, drafting and reviewing independent contractor agreements, and navigating investigations or litigation involving misclassification claims. Do not hesitate to contact us for guidance tailored to your specific workforce needs.
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