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On January 9, 2023, the United States Department of Labor issued a new final rule regarding the proper classification of workers as independent contractors under the Fair Labor Standards Act. While the rule is technically new, it is, in substance, a recitation of the applicable law regarding the proper classification of workers set forth by the Supreme Court.
Prior to recent rule making, caselaw guided the determination of whether a worker was an employee or independent contractor under the Fair Labor Standards Act (“FLSA”). In United States v. Silk, the United States Supreme Court outlined the factors relevant to the determination: degree of control, opportunities for profit or loss, investment in facilities, permanency of relations and skill required in the claimed independent operation. The Silk court noted that “no one factor is controlling.” Just about every court, federal or state, applies the same or similar standard to determine the issue under the FLSA or state statutes regarding minimum wage and overtime pay.
The new rule and the case law arose under the FLSA, but workers have challenged the classification in other contexts as well. In addition to the fact that independent contractors are not protected by the FLSA and state statutes that impose overtime and minimum wage protections, they lack other protections as well. They are not entitled to employee benefits such as health care, or to unemployment compensation under most state laws. They are generally not covered by workers compensation policies. Employers do not have to pay the employer portion of federal and state taxes for independent contractors. Many employers sought to lower the cost to employ workers by improperly classifying them as independent contractors. In these contexts, courts, regulators and state and federal agencies generally apply a test similar to that set forth in United States v. Silk. The Internal Revenue Services has its own twenty-three factor test, but the factors are similar to the Silk factors.
Employers face expensive consequences for classifying an employee improperly. A finding by a court that an employer improperly classified an employee as an independent contractor can result in liability under the FLSA and state minimum wage and overtime laws; the Employee Retirement Income Security Act; federal and state tax laws; and, unemployment compensation laws. Each of these statutes includes penalties and attorney’s fees provisions in favor of the employee. Tax, unemployment and workers compensation authorities may require an audit of all workers to ensure compliance. In the event an employer has failed to pay employee taxes or contribute to unemployment or workers compensation funds, the employer will be subject to penalties for those violations. If the employer has misclassified an entire class of worker, this could multiply the consequences.
In 2021, the Department of Labor issued a Final Rule (the “2021 Rule”) to implement regulations interpreting the factors set forth in United States v. Silk. The 2021 Rule attempted to assign weight on certain of the six factors, despite the consistent language of the case law that no one factor is controlling. That rule stated that the worker’s “economic dependence” on the employer was the “ultimate inquiry”. Out of the six factors cited in United States v. Silk and its progeny, the 2021 Rule stated that the “nature and degree of control over the work” was the most important factor, reciting that the remaining factors “are less probative and, in some cases, may not be probative at all.” This resulted in a more employer-friendly interpretation of the regulation.
However, the truth is that these types of regulations are merely interpretations of the FLSA, and the court will be the last word on interpretation of the statute. The same is true of similar state statutes.
The new rule mirrors the language of the case law. It recites that the ultimate inquiry is the worker’s “economic dependence.” It then identifies that the six factors “should guide an assessment of the economic realities of the working relationship and the question of economic dependence.” The rule requires, as does the applicable case law, that this is a “totality of the circumstances” analysis, and the weight to give each factor will depend on the facts of each particular case.
The rule then recites the six factors, and provides guidance in how to apply those factors, including examples for each factor. In this way, this rule does put its thumb on the scale in favor of a finding that the worker is an employee. For example, the rule recites that the analysis of whether or not there is an “opportunity for profit or loss” depends on the worker’s “managerial skill”. The rule recites that the ability to work more hours or take more jobs when the worker is paid a fixed rate per hour does not indicate that the worker is properly classified as an independent contractor.
The new rule does not dramatically change the analysis any more than the 2021 Rule did. The courts will still be the last word on classification under the FLSA. The new rule is consistent with federal and state caselaw on the topic. In the end, it is the courts that will make those determinations, and the case law provides the best analysis of whether an employer has properly classified an employee. Further, the rule applies only to the FLSA. Some states, such as California, have stricter independent contractor rules. The IRS has its own rules. The regulation’s guidance is helpful, but there is no change as to how to analyze the issue of a classification of the worker: employers will need to analyze the particular worker under the applicable state and federal case law and regulatory guidance and make a decision that factors in the expensive consequences of getting it wrong.
Patricia Collins is a Partner and Employment Law Chair with Antheil Maslow & MacMinn, LLP, based in Doylestown, PA. Her practice focuses primarily on employment, commercial litigation and health care law. Patricia Collins can be contacted at 215.230.7500 ext. 126.
Reprinted from the October 18th edition of The Legal Intelligencer. (c) 2023 ALM Media Properties. Further duplication without permission is prohibited.
On January 5, 2023, the Federal Trade Commission (“FTC”) issued a proposed final rule that would result in a ban of non-compete agreements, and would require employers to rescind existing non-compete agreements. The public comment period for the rule terminated on April 19, 2023, but the FTC has acted aggressively to ban non-competes in the meantime. The FTC has filed complaints against companies that use non-compete agreements, resulting in consent orders that accomplish the recission of hundreds of existing non-compete agreements. The United States Department of Labor, the National Labor Relations Board and even the courts have also taken steps to deter the use of non-compete agreements.
Last year, we warned you in our business law blog that a new law, the federal Corporate Transparency Act, would be going into effect that would require many businesses to provide information about their owners and anyone who controls the company to the federal government. We now know that this law will take effect on January 1, 2024. Reporting companies in existence prior to that date have until January 1, 2025 to comply; companies formed on or after that date must comply within 30 days after formation. Once the data has been entered, companies are obligated to update any information that becomes outdated or is incorrect. The information will be included in a database that will be used to combat money laundering, financing of terrorism, and other illegal activities.
With yet another celebrity divorce making headlines, this time with Joe Jonas and Sophie Turner, there is more buzz on Prenuptial Agreements, as it has been reported that Joe and Sophie have one in effect. Entering into a Prenuptial Agreement is common for celebrities, because they often have a great deal of wealth that they want to protect. Similarly, because of their high income, many will want to limit the alimony awarded to their spouse after a divorce. Last, but not least, celebrities are highly motivated to achieve a prompt resolution in order to avoid their case playing out in the court system – with all the negative publicity that may entail.
So we know that the rich and famous are well advised to utilize Prenuptial Agreements for all of these reasons, but how can you decide if a Prenup is necessary for you?
As is many times the case in legal questions, the best answer is, “it depends”. Prenuptial Agreements are powerful instruments which can protect your assets and help avoid conflicts in the event of a divorce. If you are bringing significant assets into the marriage, or expect to inherit significant assets someday, if you have children from a previous relationship, or if, for any number of reasons, you are concerned to ensure a specific resolution in case of a breakup, a Prenuptial Agreement can provide peace of mind.
Reprinted from the April 20th edition of The Legal Intelligencer. (c) 2023 ALM Media Properties. Further duplication without permission is prohibited.
In Sharp v. S&S Activewear, LLC, the United States Court of Appeals for the Ninth Circuit tackled the difficult issue of when a generally toxic workplace becomes a hostile environment under Title VII. 42 U.S.C. § 2000e-2(a)(1). The Ninth Circuit’s conclusion that employees’ allegations regarding playing offensive music in the workplace were sufficient to state a claim for a hostile work environment under Title VII relied on recent Supreme Court precedent, in Bostock v. Clayton County, 140 S. Ct. 1731 (2020); and Oncale v. Sundowner Offshore Servs, 523 U.S. 75 (1998).
Reprinted from the April 2023 edition of Business Law Today. Further duplication without permission is prohibited.
By Susan A. Maslow
In the late 2010s and early 2020s, ESG—a wide-capturing acronym standing for “environmental, social and governance”—roared into action, emerging both domestically and abroad as one of the defining trends in investing, regulation, finance, and corporate governance.
ESG’s proponents have long sought a unified framework through which to describe interrelated standards of environmental sustainability and human rights, and bring them into greater alignment with the private sector’s traditional profit-seeking goals. This change in approach arguably gained in prominence after the Business Roundtable’s 2019 declaration on the purpose of the corporation, endorsing a vision of corporations being led for the benefit of all stakeholders, not just shareholders. Though many question the sincerity and commitment of the Roundtable, the ESG movement was super-charged, and it achieved mainstream status during the 2020 protests for racial justice, which spurred companies to integrate new goals for diversity, equity, inclusion, and racial justice into their broader ESG policies. Over the course of the last eighteen months, public company boards have been sued for breaches of fiduciary duty based on alleged failures to react to ESG factor “red flags.”