Smith Eilers, PLLC
On October 13, 2022, the Department of Labor (DOL) published a Notice of Proposed Rulemaking, which would provide additional guidance on determining whether an independent contractor (IC) was a misclassified employee under the Fair Labor Standards Act (FLSA).
You may recall that in 2021 there was an attempt to refine the IC rule by utilizing five economic reality factors (Permanency; Specialized skill; Relative investment of worker; Opportunity for profit or loss; Control) of which two were designated “core factors” (Control and Opportunity for profit and loss).
This test was an attempt to simplify the analysis with modest changes aimed at providing greater clarity for companies and workers. Control and Opportunity for profit and loss have always been the two factors that control the outcome of the six-factor analysis. Simply stated, if a party wins those two factors, they never lose the case and vice-versa. Given that these factors so universally dictated the outcome, utilizing them as primary factors seemed a logical shortcut.
Whilethere was an attempt to rescind that rule, which was tied up various appeals, eventually it was held that there were procedural defects in failing to take comments and provide a rationale behind the withdrawal. The result was that the 2021 Rule was never repealed and remains through this day the controlling analysis.
To that end, it is important to note that this is a Notice of Proposed Rulemaking, and that it is open for comments for a period of 45 days from the date it was published (October 13, 2022) [1]. I encourage all industry associations and any individual companies who would be affected by the proposed rule to retain a firm that can prepare and submit a comment on their behalf. The comment period can delay or change the operation of a proposed rule, or even cause it to be abandoned or significantly revised. For this reason, we do not recommend that anyone make any change to any policy, program, or status based upon a proposed rule. Instead, there will be ample time between finalization and the effective date for any necessary accommodations to take place.
The newly proposed rule is built upon the familiar six-factor economic realities test to determine whether one is properly classified as an IC. Note that this six-factor test brings back the flawed interpretation of the “integral part of employer’s business.” It also provides an overall guiding principle or theory (though the rule does not elucidate it that clearly or elaborate as to how it might operate in practice) of looking to whether the worker is “economically dependent” upon the employer for work and income.
The DOL’s stated purpose for the proposed rule is to broaden the scope of and definition of employee when compared the prior test. From a purely legal and logical point of view, without any prejudice in favor of employers, employees, and contractors, it is my opinion that this “Rule” to the extent it provides anything, is harmful to all affected parties. It will decrease predictability of outcomes and creating more predictable outcomes should be a required primary focus of every proposed rule change.
Once again, a flawed, mis-quoted factor has been reinserted to the test. I, of course, refer to whether the purported employee is an “integral part of employer’s business.” We are compelled to point out that this factor is a misinterpretation of precedent and appears more akin to a children’s game of “telephone”, than the manner in which American Jurisprudence should operate. This factor originated in Rutherford Food Corp. v. McComb, 331 U.S. 722, 726, 67 S. Ct. 1473,1475 (1947), in which the Supreme Court utilized the phrases “integrated economic unit” and explained that one primary reason it was finding the IC’s to have been misclassified was in part because their work was as “part of the integrated unit of production” alongside workers classified as employees, doing the identical task.
Rutherford Food additionally found that the workers used company equipment and could not or did not work for anyone else. In short, there is no precedential originating source for the now utilized factor of "integral part of the employer’s business,” nor is there a logical connection between looking at whether IC and employees work in a fully integrated setting performing the same task, and whether an IC is important to the employer’s business, which is how the factor is presently and wrongfully considered.
This error was launched, unwittingly, by the Department of the Treasury in November of 1947, via proposed regulations under the Social Security Act (SSA), where it re-drafted this factor as “integration of the individual’s work in the business to which he renders service.” This is quite different from the Rutherford Food factor in purpose and effect. While Rutherford Food may have permitted that consideration, the analysis was about independent contractors and employees working side by side at the same task. Id. at 726 (“The boners work alongside admitted employees of the plant operator at their tasks. The task of each is performed in its natural order as a contribution to the accomplishment of a common objective.").
So, the IRS, a body no longer utilizing this factor, and which at present has no relation to the FLSA, created a sixth factor by failing to apprehend the opinion in Rutherford Food, and suggested that these six factors determine the economic reality. Sensibly, congress rejected the IRS test the following year, describing it as “a dimensionless and amorphous abstraction” that would confer upon “the administrative agencies and the courts an unbridled license to say, at will, whether an individual is an employee or an independent contractor.”
However, the die was cast: the misstatement was repeated as a means of finding employee status, and it then began to trickle into opinions until eventually, the misapprehension become the commonplace and even standard. Now, the factor is tossed around by the modern DOL and Courts without a moment of analysis of what it means or from whence it came.
The Supreme Court has never announced a test utilizing the factor of “integral to the business” of the purported employer, and Congress has never utilized such a concept. It is instead the likely result of lawyers cherry-picking language that was not actually part of a holding in citing a case for some principle. At some point, someone pulled “integral” from an agriculture or interstate commerce case and utilized it in place of employees and contractors being “integrated” into a single line of production. See also Encino Motorcars, LLC v. Navarro,138 S. Ct. 1134, 1140 (2018). Regardless, it appears that the goal and purpose of this latest proposed rule change is to allow judges greater freedom in determining whichever outcome they prefer regardless of facts in evidence, since there is no methodology suggesting for balancing factors, and since they can all be ignored based upon a feeling or perception of “economic dependence.”
A few final notes: This rule is limited inapplicability as presently drafted to cases brought pursuant to the FLSA, and not any other statutory or common law basis (IRS, NLRA, Title VII, common law, state). However, as we have seen, courts adopt other expedient tests when they prefer that guidance and there is not some other controlling precedent. Thousands of comments have been submitted in just the first few days, and we encourage every single stakeholder to make their voice heard.
For text of the proposed rule, you may use this link: https://www.regulations.gov/document/WHD-2022-0003-0001
If you would like to discuss how the proposed rule change might affect your business, or how we can assist you or your industry group in drafting unimpactful comment to the DOL, please do not hesitate to contact us.
[1] In response to industry association pressure, the comment period has been extended by an additional fifteen days.
