The 2024 DOL FLSA Independent Contractor Rules: Similar to the Fourth Circuit’s Existing Standard

Effective July 1, 2024, the Department of Labor’s new independent contractor rules provide guidelines for distinguishing between employees and non-employee independent contractors, for purposes of the overtime and minimum wage requirements of the Fair Labor Standards Act. As explained below, the DOL rules closely parallel the test that the Fourth Circuit has historically applied in FLSA cases.

Statutory and Regulatory Background

The FLSA requires covered employers to pay minimum wages and overtime compensation to certain categories of employees. 29 U.S.C §§ 206 -207. The FLSA also imposes recordkeeping requirements on employers. 29 U.S.C. § 211. These requirements raise questions about what it means to be an “employer” or an “employee,” and, more specifically, about the nature of the employment relationship that falls within the scope of the FLSA’s minimum wage and overtime requirements.

The FLSA itself defines these terms broadly, but without great clarity. Section 203 of the FLSA defines “employer” to include “any person acting directly or indirectly in the interest of an employer in relation to an employee[.]” 29 U.S.C. § 203(d). The FLSA defines the term “employee” to generally mean “any individual employed by an employer.” 29 U.S.C. § 203(e). And it defines “employ” as “includes to suffer or permit to work.” 29 U.S.C. § 203(g).

In FLSA cases, disputes often arise as to whether a worker is an “employee,” entitled to minimum wages and overtime under the FLSA, or a non-employee “independent contractor” to which the FLSA does not apply. Sometimes, workers are misclassified as independent contractors, when under the FLSA they are really employees.

The Fourth Circuit’s Employee / Independent Contractor Test

The Fourth Circuit has historically assessed whether a worker is an employee or a non-employee independent contractor using a six-factor “economic realities” test. The factors are:

(1) the degree of control that the putative employer has over the manner in which the work is performed;

(2) the worker’s opportunities for profit or loss dependent on his managerial skill;

(3) the worker’s investment in equipment or material, or his employment of other workers;

(4) the degree of skill required for the work;

(5) the permanence of the working relationship; and

(6) the degree to which the services rendered are an integral part of the putative employer’s business.

Schultz v. Capital Int’l Sec., Inc., 466 F.3d 298 (4th Cir. 2006). “These factors are often called the ‘Silk factors.’ No single factor is dispositive; the test is designed to capture the economic realities of the relationship between the worker and the putative employer.” Id. (Derived from United States v. Silk, 331 U.S. 704, 67 S. Ct. 1463 (1947)).

The 2024 DOL Employee / Independent Contractor Test

The DOL’s 2024 employee / independent contractor regulations adopt a totality of the circumstances, economic realities test that is consistent with the historical Fourth Circuit test:

Of particular note, the regulations set forth in this final rule do not use “core factors” and instead return to a totality-of-the-circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity.

Employee or Independent Contractor Classification Under the FLSA, 89 Fed. Reg. 1638 (Jan. 10, 2024) (Amending 29 C.F.R. § 795).

The 2024 DOL factors closely parallel the Silk factors discussed above and historically applied by the Fourth Circuit. Shortened, they are:

(1) Opportunity for profit or loss depending on managerial skill,

(2) Investments by the worker and the potential employer,

(3) Degree of permanence of the work relationship,

(4) Nature and degree of control,

(5) Extent to which the work performed is an integral part of the potential employer’s business, and

(6) Skill and initiative.

29 C.F.R. 795.110. “Additional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA, if the factors in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the potential employer for work.” Id. Thus, like the Fourth Circuit, the DOL embraces an economic realities test that balances the relevant factors.

And like the Fourth Circuit explained in Schultz, the ultimate inquiry in using the factors is still “whether the [workers] were, as a matter of economic reality, dependent on the business they served, or, conversely, whether they were in business for themselves.” Schultz v. Capital Int’l Sec., Inc., 466 F.3d 298 (4th Cir. 2006). See also Employee or Independent Contractor Classification Under the FLSA, 89 Fed. Reg. 1638 (Jan. 10, 2024) (Amending 29 C.F.R. § 795) (“The ultimate inquiry is whether, as a matter of economic reality, the worker is economically dependent on the employer for work (and is thus an employee) or is in business for themself (and is thus an independent contractor).”)

Thus, the DOL’s 2024 FLSA independent contractor test is similar to the economic realities test historically applied in the Fourth Circuit. Both tests consider the same basic factors in their totality.

Special thanks to Hannah Wyatt for her work on this post!

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Bartels v. Birmingham: Early Economic Reality Test For Employment Relationship in Music Industry

In Bartels v. Birmingham, 332 U.S. 126, 67 S. Ct. 1547 (1947), the Supreme Court held that members of musical bands were employees of the bands’ leaders, rather than of the operators of the dance halls where the bands played, within the meaning of the Social Security Act. The Court emphasized that, inter alia, the band leader organized and trained the band, that the leader’s musical skill determined the success or failure of the band, and the relationship between the leader and the band members was permanent. The case is important because, inter alia, it applied an “economic reality” test, using the reasoning in United States v. Silk, 331 U.S. 704 (1947), for determining the existence of an employment relationship. This test for determining whether a worker is an employee or an independent contractor, and which entities are employers, came to be applied in cases under the Fair Labor Standards Act. See Schultz v. Cap. Int’l Sec., Inc., 466 F.3d 298, 304–05 (4th Cir. 2006).

Statutory and Regulatory Background

While Bartels and Silk involved cases brought under a different law, the Social Security Act, the “economic realities” test they articulated for determining whether a worker is an employee or an independent contractor came to be applied in FLSA cases. See Schultz v. Cap. Int’l Sec., Inc., 466 F.3d 298, 304–05 (4th Cir. 2006).

Facts

Bartels examined relationships between the operators of dance halls, the leaders of bands that played in these dance halls for “limited engagements”, and the musicians in those bands.

In a nutshell, the band leaders contracted with various ballroom operators to play at their establishments for a contract price. 332 U.S. 126, 127. Most of the engagements at issue were one-night performances, although some were for performances over several successive nights. 332 U.S. at 127–28.

As a practical matter, the Court observed that the “leader exercise[d] complete control over the orchestra.” 332 U.S. at 128. The leader set the musicians’ salaries, paid them, and told them what and how to play. Id. He provided the sheet music and arrangements, the public address system, and the musicians’ uniforms. Id. He hired and fired the musicians. The band leader paid for expenses, including agents’ commissions, transportation and other expenses out of the payments received from the dance hall operators. Id. Any extra money left over after the expenditures was “his profit and any deficit his personal loss.” Id. The operators of the dance halls provided the piano but not the other instruments. Id.

The relationship between the parties was complicated, however, by the contracts between the dance hall operators and the union that band leaders and musicians belonged to. 332 U.S. at 128. The Court observed that the form contract stated “that the ballroom operator is the employer of the musicians and their leader, and ‘shall have complete control of the services which the employees will render under the specifications of this contract.’” Id.

The Circuit Court of Appeals had placed great weight on the terms of the contract. It applied the “common law test of control, i.e., that one was an employer if he had the ‘right’ to direct workers in what should be done and how it should be done.” Id. at 129. It concluded that the contract between the parties gave the ballroom operators the “‘right’ to control the musicians and the leader, whether or not the control was actually exercised.” Id. The Circuit Court of Appeals determined that while the contract was not binding on the government, it was binding on the parties, and therefore the leader and musicians were employees of the dance hall operators under the SSA if taxing authorities accepted the arrangement as valid. Id.

The question for the Supreme Court in Bartels was whether the facts showed that the musicians were “employees” of the band leader, or of the ballroom operators, within the meaning of the Social Security Act.

The Court’s Decision

The Bartels Court reversed. It held that the musicians were “employees” of the band leader within the meaning of the SSA.

The Court observed that under Silk, the employment relationship was to be determined a multi-factor test that examined the “economic reality” of the situation:

In United States v. Silk … we held that the relationship of employer-employee, which determines the liability for employment taxes under the Social Security Act was not to be determined solely by the idea of control which an alleged employer may or could exercise over the details of the service rendered to his business by the worker or workers. Obviously control is characteristically associated with the employer-employee relationship but in the application of social legislation employees are those who as a matter of economic reality are dependent upon the business to which they render service. In Silk, we pointed out that permanency of the relation, the skill required, the investment if the facilities for work and opportunities for profit or loss from the activities were also factors that should enter into judicial determination as to the coverage of the Social Security Act. It is the total s[it]uation that controls.…

332 U.S. at 130.

Applying these “economic reality” factors to the facts in Bartels, the Court concluded that the musicians were employees of the band leader, not the dance hall operator:

We are of the opinion that the elements of employment mark the band leader as the employer in these cases. The leader organizes and trains the band. He selects the members. It is his musical skill and showmanship that determines the success or failure of the organization. The relations between him and the other members are permanent; those between the band and the operator are transient. Maintenance costs are a charge against the price received for the performance. He bears the loss or gains the profit after payment of the members’ wages and the other band expenses.

332 U.S. at 132. Thus, the Court reasoned that the totality of the circumstances indicated an employer-employee relationship between the band leader and the musicians. The Court accordingly held that under this analysis — applying the economic reality test described in Silk — the musicians were “employees” of the band leader within the meaning of the SSA.

Analysis

In sum, Bartels held that members of a musical band were employees of the band’s leader, rather than of the operators of the ballrooms where the band played, within the meaning of the Social Security Act. The case is important because, inter alia, it applied an “economic realities” test, using the reasoning in Silk, 331 U.S. 704 (1947), for determining the existence of an employment relationship. This test for determining whether a worker is an employee or an independent contractor, and which entities are employers, came to be applied in cases under the Fair Labor Standards Act. See Schultz, 466 F.3d 298, 304–05 (4th Cir. 2006).

Kasten v. Saint-Gobain: Scope of FLSA Protected Activity

In Kasten v. Saint-Gobain Performance Plastics Corp., 563 U.S. 1 (2011), the Supreme Court held that the anti-retaliation provision of the Fair Labor Standards Act protects employees who make oral (as well as written) complaints that their employer violated the FLSA.

Facts

Kasten worked for Saint-Gobain Performance Plastics. He complained orally to his superiors that the company located its timeclocks between the area where Kasten and his co-workers put on (and removed) their work-related protective gear and the area where they carried out their job duties. This location, Kasten complained, prevented workers from receiving credit for the time they spent putting on and taking off their work clothes — contrary to the requirements of the FLSA. Kasten complained only orally and did not make a written complaint. Saint-Gobain fired him. Id. at 5-6.

Kasten then sued his former employer, alleging that Saint-Gobain violated the FLSA’s anti-retaliation provision by terminating him for complaining orally about the legality of the location of the timeclocks. The trial court granted summary judgment for the employer, holding that the FLSA’s anti-retaliation provision covered only written complaints and did not cover oral complaints. The Seventh Circuit affirmed and Kasten appeals.

The Court’s Decision

The FLSA’s anti-retaliation provision makes it unlawful for employers “to discharge or in any other manner discriminate against any employee because such employee has filed any complaint or instituted or caused to be instituted any proceeding under or related to [the FLSA], or has testified or is about to testify in such proceeding, or has served or is about to serve on an industry committee.” 29 U.S.C. § 215(a)(3) (emphasis added).

Read the full blog at TimCoffieldAttorney.com.

FLSA Executive Employee Exemption: Management and Direction

The Fair Labor Standards Act requires covered employers to pay minimum wages and overtime compensation to certain categories of employees. However, the law contains several exceptions or “exemptions” from these requirements, most of which turn on a combination of the employees’ pay and the nature of their job duties. For example, Section 13(a)(1) of the FLSA, a.k.a. 29 U.S.C. § 213(a)(1), provides an “exemption” from both minimum wage and overtime pay for certain categories of so-called “white collar” employees — namely, employees working as bona fide executive, administrative, professional, or outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain categories of computer employees.

To qualify for a white collar exemption, employees must be paid on a salary basis at not less than $684 per week (as of January 1, 2020) and have job duties that satisfy certain requirements. Importantly, job titles do not determine whether an employee is exempt from the FLSA. For an employee to be exempt, her actual real-life job duties and salary must meet all the requirements of the FLSA and the Department of Labor’s implementing regulations.

This post will focus on the exemption for executive employees. The Department of Labor is also an excellent resource for information about the executive employee exemption. The DOL’s implementing regulations with respect to the executive employee exemption are generally located at 29 CFR §§ 541.100-106.

Read the full article at TimCoffieldAttorney.net.

FLSA Administrative Employee Exemption: Discretion and Independent Judgment

The Fair Labor Standards Act requires covered employers to pay minimum wages and overtime compensation to certain categories of employees. However, the law contains several exceptions or “exemptions” from these requirements, most of which turn on a combination of the employees’ pay and the nature of employees’ job duties. For example, Section 13(a)(1) of the FLSA, a.k.a. 29 U.S.C. § 213(a)(1), provides an “exemption” from both minimum wage and overtime pay for certain categories of so-called “white collar” employees — namely, employees working as bona fide executive, administrative, professional, or outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain categories of computer employees.

This post will focus on the exemption for administrative employees. The Department of Labor is also an excellent resource for information about the administrative employee exemption. The DOL’s implementing regulations with respect to the administrative employee exemption are generally located at 29 CFR § 541.200-204.

Administrative Employee Criteria

To qualify for the administrative employee exemption (and therefore, not be entitled to receive overtime pay under the FLSA), an employee must meet all of the following requirements:

The employee must be compensated on a “salary basis” (as defined in 29 CFR § 541.602) or “fee basis” (as defined in 29 CFR § 541.605) at a rate not less than $684 per week (lower amounts apply for non-federal employees in U.S. territories);
The employee’s “primary duty” must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers;
The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

29 CFR § 541.200.

Definition of “Primary Duty”

As used in these regulations, “primary duty” means the principal, main, major or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole. Factors to consider when determining an employee’s primary duty include, without limitations, the relative importance of any exempt duties as compared with other types of duties; the amount of time spent performing exempt work; the employee’s relative freedom from direct supervision; and the relationship between the employee’s salary and the wages paid to other employees for the kind of nonexempt work performed by the employee. 29 CFR § 541.700.

Definition of “Directly Related to Management or General Business Operations”

To meet the “directly related to management or general business operations” requirement, an employee must perform work directly related to assisting with the running or servicing of the business. This is different from, for example, working on a manufacturing production line or selling a product in a retail or service establishment. 29 CFR § 541.201(a).

As defined in the DOL regulations, work “directly related to management or general business operations” includes, but is not limited to, work in functional areas such as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations; government relations; computer network, Internet and database administration; legal and regulatory compliance; and similar activities. 29 CFR § 541.201(b)

Work Directly Related to Management or Operations of Customers

It’s worth noting that an employee may qualify for the administrative exemption if her primary duty is performing work directly related to the management or general business operations of the “employer’s customers.” 29 CFR § 541.201(a). This means that an employee who acts as a consultant to her employer’s clients or customers — as tax experts or financial consultants, for example — may qualify for the exemption. 29 CFR § 541.201(c).

Read the full blog at CoffieldLaw.com or TimCoffieldAttorney.net.

Christensen v. Harris County: Compelled Use of FLSA Compensatory Time

In Christensen v. Harris County, 529 U.S. 576 (2000), the Supreme Court held that the Fair Labor Standards Act does not prohibit public employers from compelling employees to use compensatory time.

Background

The Fair Labor Standards Act allows public employers (including states and their political subdivisions) to compensate employees for overtime work by granting them compensatory time instead of paying them a cash overtime wage. 29 U.S.C. § 207(o). Compensatory time is paid time off. To comply with this part of the FLSA, the public employer must provide the compensatory time at a rate not less than one and one-half hours for each hour of overtime worked. Id. Compensatory time can accumulate, like vacation time. Importantly, if employees do not use their accumulated compensatory time, under certain circumstances the FLSA requires the public employer to pay the employees cash compensation. 29 U.S.C. §§ 207(o)(3)-(4).

Read the full blog at TimCoffieldAttorney.com or CoffieldLaw.com.