U.S. Department of Labor Issues New Opinion Letter Clarifying Independent Contractor Status
On January 19, 2021, the U.S. Department of Labor’s Wage and Hour Division (“WHD”) issued an Opinion Letter applying the Department’s recently-issued Final Rule concerning Independent Contractor Status under the Fair Labor Standards Act (the “Final Rule”). This Opinion Letter provides helpful guidance to businesses, especially those in highly-regulated industries, on how to properly structure their relationships with independent contractors under the Fair Labor Standards Act (“FLSA”).
As background, the FLSA’s minimum wage and overtime pay obligations apply only to those workers it defines as employees—individuals who are economically dependent on a business for continued employment. These obligations do not apply to independent contractors—individuals who, as a matter of economic reality, are in business for themselves.
The Department issued the Final Rule, effective March 8, 2021, to demarcate employee from independent contractor. See 86 FR 1168, 1172–1175. The Final Rule, modifying factors utilized by the federal courts of appeal, employs five non-exhaustive factors to guide the analysis, which we discussed here. 29 C.F.R. § 795.105(d).
In FLSA2021-9, the WHD addressed two related issues under the Final Rule: (1) whether requiring tractor-trailer truck drivers to implement safety measures required by law constitutes legally significant control by the motor carrier (thus, making them more likely to be employees); and (2) whether certain owner-operators of a logistics company are properly classified as independent contractors.
With respect to the first issue, the inquiring motor carrier requires its drivers to install and use onboard safety monitoring systems and attend monthly safety meetings. The carrier does so to meet its obligations under regulations promulgated by the Federal Motor Carrier Safety Administration (“FMCSA”), which, inter alia, require carriers to ensure their drivers are qualified. See 49 C.F.R., subtitle B, ch. III, subch. B. The motor carrier asked whether imposing these safety requirements suggested that its drivers were employees, not independent contractors.
Although monitoring driving and requiring attendance at safety meetings are exercises of control in the most basic sense of the word, the WHD found this type of control does not make employee status more or less likely because “‘insisting on adherence to certain rules to which the worker is already legally bound’ says nothing about whether the worker is an employee or an independent contractor.” FLSA2021-9, at 4 (quoting 86 FR at 1182). Stated differently, because the FMCSA’s regulations apply to all drivers engaged by motor carriers, whether employees or contractors (see 49 C.F.R. § 390.5), requiring drivers to comply with them is irrelevant for determining whether drivers are employees or independent contractors.
This principle has broad implications as it presumptively applies to any business required to ensure that its contractors perform their work safely.
With respect to the second issue, a logistics company inquired as to whether it properly classified certain owner-operators as independent contractors. The company employed some drivers and engaged independent owner-operators. After applying the five factors of the Final Rule, the WHD found that the independent owner-operators were likely properly classified as independent contractors.
Control. The owner-operators select shipments from a virtual platform run by the logistics company. The owner-operators decide which movements to perform and the routes to complete them. They are also permitted not to perform movements, to work for other logistics companies, and to set their own hours, albeit in compliance with FMCSA safety regulations. The WHD found this suggested independent contractor status: “Having full control of one’s schedule and being non-exclusive, including working for potential competitors, are facts that usually dictate that a worker exercises substantial control over key aspects of the performance of their work.”
Profit/Loss. The WHD explained that this factor, too, suggested independent contractor status because the logistics company’s owner-operators can (and do) increase profits through business acumen and/or investment. The owner-operators “strategically determine what freights to select, whether and whom to hire [i.e., subcontract], how to insure their trucks or businesses, and what types of capital investments to make.” Further, the owner-operators created a marketable business by investing in their tandem vehicles.
Because the control and profit/loss factors—the two “core” factors employed by the Final Rule—favored independent contractor status, the WHD explained that absent unusual circumstances, this would ordinarily establish independent contractor status. But the WHD also found that two of the three remaining factors favored independent contractor status, cementing its conclusion that the owner-operators were properly classified as independent contractors.
Skill. The WHD found this factor favored independent contractor status because the owner-operators obtained commercial vehicle licenses without the aid or training of the logistics company. In other words, the owner-operators independently acquired the know-how to qualify for and require a commercial license, which they could then use to market their services. The only training that the logistics company provides is on the particulars of its business, not on the skills necessary to become a commercial driver in the first place.
Permanence. The WHD found this factor favored independent contractor status because the logistic company’s relationship to its owner-operators was sporadic and definite: owner-operators signed one-year, non-renewable contracts subject to termination on 15 days’ notice.
Integration. This was the only factor that the WHD found could potentially favor employee status. Because the logistics company’s employee-drivers performed the same type of work as the independent owner-operators, although they did so in divergent ways, this suggested “that the [performance of movements] itself is integrated into the potential employer’s operations—or, at the very least, that the potential employer views it as such.” However, when weighed against the other four factors, especially the two core factors, it was not enough to tilt the balance in favor of employee status.
The upshot from this Opinion Letter is the following:
Where companies allow their contractors to work for competitors, to complete projects without day-to-day direct supervision, and to pick and choose their hours, it is more likely that they are independent contractors.
Where contractors may increase their overall profits through business acumen and/or investment, it is more likely that they are independent contractors.
Where contractors acquire the necessary skills to perform a project before becoming engaged by a business, it is more likely that they are independent contractors.
Where contractors are engaged on a temporary, sporadic basis, as opposed to a continuous basis with no clear end date, it is more likely that they are independent contractors.
Where contractors do not perform essentially the same services as bona fide employees, it is more likely that they are independent contractors.
Although this Opinion Letter provides welcome guidance, it is still advisable for businesses to have their independent contractor classifications audited by counsel. This is especially so as the Biden Administration may or may not seek to strike down or replace the Final Rule. In addition, state laws may differ from federal law with respect to worker classification, and it is important to comply with both federal and state law.