Clarity of Classification: Independent Contractors
November 9, 2022
The Fair Labor Standards Act (FLSA) was enacted in the 1930’s to put some structure around the US employment relationship. Most commonly, we think of the overtime provisions, but it also includes the federal minimum wage. The act defines “employee” much more broadly than common law would typically use, and doesn’t define “independent contractor,” but the courts have recognized that not everyone is an “employee” under the law.
Prior to 2021, the US Department of Labor had issued guidance, but had never promulgated a rule, and while there was some understanding, it was not codified as regulation.
Massachusetts does have a law that describes an Independent Contractor (MGL c.149, § 148B) using what is called “the 3 prong test”:
- the individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact
- the service is performed outside the usual course of the business of the employer
- the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed
The state statute provides clarity for what an Independent Contractor is under state law, however, the Federal law lacks definition under the FLSA, which has made for some ambiguity.
In January 2021, the Department of Labor published a rule that changed the federal analysis of Independent Contractor status. However, in a series of administrative moves, it was delayed until earlier this year when a federal district court in Texas reimposed these retroactively, to the original effective date. This regulation simplified the analysis and stressed two core factors.
On October 11, the Department of Labor proposed a modification of regulations for determining employee or Independent Contractor classification. This new proposed change rescinds the 2021 rule and creates an analysis more consistent with precedent and guidance in place prior to that, despite the less clear nature and historically inconsistent application.
The proposal returns a “totality of the circumstances” analysis to what is called the “economic reality test”. The 2021 regulations applied a weight to several “core factors” which include looking at: supervision, price-setting, ability to work for others, and whether the work is integral to the employer’s business. This affects Federal Administration of Labor Standards, not state law. In other words, an Independent Contractor under Massachusetts law may or may not be one under Federal law, and both should be kept in mind when classifying workers.
Their comment period has been extended until December 13, 2022.