The U.S. Department of Labor (“DOL”) announced on May 5, 2021—effective May 6—the withdrawal of the “Independent Contractor Status Under the Fair Labor Standards Act” (“Independent Contractor Rule” or “Rule”). The Rule was promulgated under the Trump Administration and addressed the standard to determine whether an individual is properly classified as an employee or an independent contractor under the Fair Labor Standards Act (“FLSA”). The Rule was scheduled to take effect on March 8, 2021 but had previously been delayed by the Biden Administration until May 7, 2021.
For example, in Massachusetts it may seem simple to hire a friend of a unit owner or trustee to make repairs around the condominium. However, because Massachusetts state law applies a stringent ABC test it is presumed that a worker is an employee unless the condominium can satisfy the three factors listed regarding the individual’s employment relationship with the condominium.
The withdrawal of the Rule means that there is still no bright-line rule for condominium associations or managers to follow when weighing the FLSA factors to determine whether a worker that a condominium hires is an employee or an independent contractor. When classifying their workers condominium associations and managers should also be cognizant of and comply with applicable state and local laws, which may be different than federal law.
The FLSA requires all covered employers to pay nonexempt employees at least the federal minimum wage for every hour worked in a non-overtime workweek. In an overtime workweek covered employers must pay a nonexempt employee at least one and a half times the employee’s regular rate for all hours worked more than 40 hours in a workweek. FLSA protections do not apply to independent contractors.
The FLSA’s definition of employee is very broad. Section 3(e) of the FLSA defines “employee” as “any individual employed by an employer.” Section 3(d) of the FLSA defines “employer” to “include any person acting directly or indirectly in the interest of any employer in relation to an employee.” Furthermore, Section 3(g) defines “employ” to “include to suffer or permit to work.”
Due to the definition of “employee” under the FLSA being broad, the issue of who is an employee and who is an independent contractor has been widely litigated, with some workers arguing they were misclassified as independent contractors and treated like employees, but without being afforded the FLSA protections granted to employees. The Supreme Court, in interpreting the definition of “employee” under the FLSA, has emphasized that the test for whether an individual is an employee is one of “economic reality.” This test focuses on the economic realities of the relationship between the worker and employer.
In two Supreme Court cases United States v. Silk, 331 U.S. 704 (1947), and Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947), the Court set forth that federal agencies and courts “will find that degrees of control, opportunities for profit and loss, investment in facilities, permanency of relation and skill required in the claimed independent operation are important for decision.”
Since the 1940s, federal courts have determined employee status under the FLSA by examining the economic realities of the employment relationship to determine whether the worker must depend on the employer for work or is in business for himself or herself. When analyzing the economic realities, courts have used the factors set forth in the Silk and Rutherford Food Corp. cases to help reach their decision. This is the so-called “economic realities” test.
The Independent Contractor Rule
On January 7, 2021, the Department of Labor published the Independent Contractor Rule, with a contemplated effective date of March 8, 2021. Had the Independent Contractor Rule become effective, it would have revised the DOL’s test for determining worker status under the FLSA to focus on two “core factors” (the worker’s control and opportunity for profit and loss) and three other “guidepost” factors.” The Rule stated that the existing economic realities test suffered from confusion regarding the meaning of “economic dependence,” a lack of focus in the multifactor balancing test, and confusion and inefficiency caused by overlap between the factors. The purpose of the proposed Rule was to establish a new economic realities test that would provide a generally applicable interpretation of employee or independent contractor status under the FLSA.
The Rule identified five economic realities factors that would have helped determine a worker’s status as an employee or independent contractor. The five factors were: (1) the nature and degree over the work; (2) the worker’s opportunity for profit or loss; (3) the amount of skill required for the work; (4) the degree of permanence of the working relationship between the worker and employer; and (5) whether the work is part of an integrated unit of production. The first and second factors were designated as “core factors” that would have been granted more weight in the analysis, whereas the third, fourth, and fifth factors were “non-core” factors.
Labor Department Withdraws Independent Contractor Rule
After temporarily delaying the Rule’s effective date in March 2021, the DOL issued a Notice of Proposed Rulemaking to withdraw the Rule. On May 5, 2021, the DOL announced the official withdrawal of the Independent Contractor Rule, effective May 6, 2021. The DOL cited several reasons for withdrawing the Rule including:
• The Rule was in tension with the FLSA’s text and purpose, as well as relevant judicial precedent.
• The Rule’s prioritization of the two “core factors” for determining employee status under the FLSA would have undermined the longstanding balancing approach of the economic realities test and court decisions requiring a review of the totality of the circumstances related to the employment relationship.
• The rule would have narrowed the facts and considerations comprising the analysis of whether a worker is an employee or an independent contractor, resulting in workers losing FLSA protections.
The DOL also said it anticipates that the withdrawal will avoid a reduction in workers’ access to employer-provided fringe benefits such as health insurance and retirement plans, as well as unemployment insurance and workers compensation coverage.
Due to the withdrawal of the proposed Independent Contractor Rule the same almost 80-year-old balancing test that varies from circuit to circuit, is still in effect. Furthermore, a worker’s classification may be different under the FLSA than it is under various state laws or the Internal Revenue Code. For example, Massachusetts has adopted a version of the “ABC” test that all but guarantees employee status in most scenarios. The Massachusetts ABC test presumes that a worker is an employee unless the company can show that the worker is (1) free from company direction and control (2) performs work outside the company’s usual course of business, and (3) the worker is customarily engaged in an independently established trade, occupation, or business. Federal adoption of the ABC test used by Massachusetts, however, is unlikely. The ABC test could not be adopted by the DOL without legislation from Congress. Such legislation exists within the Protecting the Right to Organize (PRO) Act, but is it highly unlikely to make it out of the Senate.
Condominiums should continue to take steps to ensure proper classification of their workers and remain aware of, and comply with, applicable state and local laws, which may be different than federal law. There are a variety of potential issues created by the hiring of any prospective worker, especially if the “economic realities” of the employment relationship with the condominium could render the individual an employee of the condominium.
For example, in Massachusetts it may seem simple to hire a friend of a unit owner or trustee to make repairs around the condominium. However, because Massachusetts state law applies a stringent ABC test it is presumed that a worker is an employee unless the condominium can satisfy the three factors listed above regarding the individual’s employment relationship with the condominium. Individuals that are considered employees under Massachusetts law are entitled to rights such as minimum wage, overtime, and other protections. A condominium that misclassifies employees as independent contractors could face criminal enforcement or civil penalties. Moreover, if that individual gets injured or causes damage to the condominium while on the job, it could cause potential liability issues for the condominium.
Tricky potential employment issues like these emphasize the need for the counsel of a condominium attorney and the assistance of a property manager if financially possible.