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.

 

    On April 1, 2020, the Department of Labor issued temporary regulations regarding the terms of the Families First Coronavirus Response Act (“Families First Act”).  The regulation provides extensive guidance regarding the regulation to help employers comply with its terms.

On March 24, 2020, the United States Department of Labor ("DOL") issued limited guidance regarding the Families First Coronvirus Response Act (the “Act”).

Most importantly, the DOL identified April 1, 2020 as the Effective Date of the Act, contrary to the conclusion of most observers that the Act would go into effect on April 2, 2020.  Accordingly, employers of all sizes should plan to come into compliance on April 1, 2020.   The DOL also clarified that the Act is not retroactive.  The DOL also advises not to send requests for the small business exemption to the department, and that it will issue regulations regarding the small business exemption at a later date.  

Friday, 06 October 2017 18:52

One Final Overtime Update…..

 

 …At least until there is another overtime update.

 Let’s review the history of these regulations.  Prior to leaving office, President Obama’s Department of Labor significantly revised the salary requirements in order for certain classifications of employees to qualify for exemptions from overtime pay under the Fair Labor and Standards Act (“FLSA”).  The DOL increased the salary minimum to qualify for an exemption from approximately $23,000 to approximately $47,000.  Small employers and nonprofits scrambled to find a way to comply with the new regulations by the compliance deadline of December 1, 2016.

 On November 22, 2016, the United States District Court for the Eastern District of Texas issued an injunction against the implementation of those rules.  Small employers and nonprofits breathed a sigh of relief and tabled their new policies and employee classification changes. 

 Between November 22, 2016 and August 31, 2017, much happened in the Eastern District of Texas and the Fifth Circuit.  Appeals were filed, extensions of time to file briefs were granted, and the Department of Labor, now led by President Donald Trump, revised its position on these rules.  President Obama’s DOL had argued that the new regulations were a proper exercise of DOL’s rule making, and the President’s executive, powers.  President Trump’s DOL argued that while the DOL and the President were within their rights to establish and revise a salary requirement, they would not defend this particular salary requirement.

 On August 31, 2017, the Eastern District of Texas agreed, essentially, with the Trump DOL.  The Court found that while the DOL is free to set and revise a salary requirement, this particular salary requirement was not enforceable. 

 The good news is that the salary requirement set by the Obama DOL was so high as to present a significant financial and operational burden for small employers and nonprofits, and this ruling eliminates that concern.  However, the ruling leaves this DOL, or any DOL, free to revisit the salary requirement.  In other words, we will all take this ride again sometime in the future. 

 Employers should continue to ensure compliance with the existing rules, and check back in with AMM for any future changes to the salary requirement. 

Employers have been working to comply with new overtime rules issued by the United States Department of Labor that raise the salary level in order to meet certain exemptions from overtime rules before a December 1, 2016 deadline.  Those rules require that in addition to meeting certain requirements with regard to an employee’s duties, the employee must also earn a minimum salary of $47,476.  The old rule required that the employee earn a minimum salary of $23,660.  The dramatic increase in the salary requirement caused employers to reevaluate classifications and to generate new policies regarding overtime and work hours.

 On November 22, 2016, the United States District Court for the Eastern District of Texas issued a preliminary injunction, temporarily barring the Department of Labor from enforcing the new overtime rule.  The order will remain in place pending a full hearing on the issue.  While the order is temporary, as a prerequisite to entering the order, the Court was required to find that there was a substantial likelihood of success on the merits of the argument that the DOL exceeded its authority in promulgating the rule.  So, there is some indication that the Court may bar enforcement of the new rules permanently. 

 For now, employers are temporarily relieved of the obligation to comply with the new rules by the December 1, 2016 deadline.  Because the outcome is not guaranteed, employers should have their new policies ready to go, but do not need to implement them on December 1.  It is simply too early to say whether employers should “shelve” those new policies.  We will have to wait for the Court’s final ruling.   Stay tuned to this space as the case unfolds. 

Patricia Collins is an employment and litigation Partner at Antheil Maslow & MacMinn, LLP and chair of the labor and employment practice group.

 

Patty Collins, a Partner with Antheil, Maslow & MacMinn, will be joined by Cindy Bergvall, CPA,  of Bee, Bergvall & Co. for a panel discussion on new Department of Labor overtime regulations and their impact on employers.  This informative breakfast seminar is hosted by The Catalyst Center for Nonprofit Management on October 7th at Aldie Mansion in Doylestown.  There is no charge for this event, but registration is required. 


These new regulations will require action from almost every for-profit and not-for-profit organization with employees earning less than $47, 476 per year. Participants will learn about the changes in the law and what organizations will need to do when the law goes into effect on December 1, 2016.

 

 

 

 

Monday, 06 May 2013 14:08

Rules Applicable to Summer Internships

With summer just around the corner, employers are inundated with requests by students for summer internships. If your company offers such opportunities, taking a few moments to review the applicable regulations will help assure that the program complies with the law.

It goes without saying that a paid intern is an employee and subject to all applicable state and federal employment laws including those pertaining to minimum wage and overtime. Even if the internship is unpaid, failure to follow Department of Labor guidelines could lead to legal liability under the Fair Labor Standards Act.

Department of Labor Guidelines

The Fair Labor Standards Act (the FLSA) provides, of course, that individuals in an employment relationship must be paid for services performed. When is an unpaid intern an employee? According to guidelines published by the Department of Labor, if the following factors are met, there is no employment relationship and the intern need not be paid:

The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;

The internship experience is for the benefit of the intern;

The intern does not displace regular employees, but works under close supervision of existing staff;

The employer that provides the training derives no immediate advantage from the activities of this intern;

The intern is not necessarily entitled to a job at the conclusion of the internship; and

The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

If all of these factors are met, the Department of Labor will conclude that an employment relationship does not exist under the FLSA. In such circumstances, minimum wage and overtime provisions do not apply to the intern.

Different rules apply for governmental agencies and non-profit organizations. Internships offered by governmental agencies, private non-profit food banks and non-profit organizations providing religious, charitable, civic, or humanitarian services are generally permissible so long as the intern volunteers his or her time freely and without anticipation of compensation.

A permissible unpaid internship will include some or all of these features:

  1. It is structured around a classroom experience as opposed to the employer’s actual operations;
  2. Academic credit is offered by a sponsoring institution;
  3. The internship provides the intern with skills that can be used in multiple employment settings as opposed to specific training in the employer’s operations;
  4. The intern does not perform the routine work of the employer;
  5. The employer is not dependent upon the work of the intern;
  6. Job shadowing opportunities that allow an intern to learn certain functions under the close and constant supervision of regular employees, but the intern performs no or minimal work.
  7. The internship is of a fixed duration established at the outset of the internship.

Factors which indicate an employment relationship (and trigger the requirement to pay wages) include:

  1. The intern is engaged in the operations of the employer;
  2. The intern is performing productive work such as, for example, filing, clerical work or assisting customers;
  3. The employer uses interns in lieu of hiring additional employees or offering more hours to existing employees;
  4. The intern receives the same level of supervision as other employees;
  5. The intern is offered employment to begin immediately upon the conclusion of the internship, effectively transforming the “internship” into a trial period of employment.

Summer internships, paid or unpaid, provide valuable experience to students. Employers need only exercise some caution is structuring the internship to avoid running afoul of DOL regulations. The DOL Fact Sheet on summer internships is available at http://www.dol.gov/whd/regs/compliance/whdfs71.htm