‘Economic Realities’ Test Adds Promise to DOL Gig Worker Rule

The Department of Labor, for the first time, has defined “independent contractor” under the Fair Labor Standards Act by publishing a final rule that replaces previous informal guidance.

The new rule, scheduled to take effect March 11, differs significantly from a 2021 Trump-era rule that streamlined the definition of the same term—before it was quickly withdrawn and replaced with a proposed rule following litigation. For gig workers, the final rule represents a return to prior judicial precedent and DOL interpretive guidance—collectively incorporating a number of factors, as well as whether a worker is economically dependent on their employer.

Workers will be better protected by this familiar and common-sense approach, guided foremost by whether and how much the worker depends on an employer financially. Various and familiar factors from prior court decisions also guide this framework.

The new rule realigns the department’s earlier totality-of-the-circumstance guidance and with longstanding judicial precedent, and should reduce confusion, improve compliance, and better protect working people.

It codifies the six-factor “economic realities” test that examines the totality of circumstances of the relationship where no one factor is presumed to carry more weight than another:

• Worker’s opportunity for profit or loss
• Investments by the worker and potential employer
• Nature and degree of the potential employer’s control over the work
• Degree of permanence of the relationship
• Extent work is integral to the potential employer’s business
• Worker’s skill or initiative

Key takeaways include actions taken for compliance with specific laws and regulations that are viewed as evidence of control under the “nature and degree of control” factor, unless those actions are performed for the “sole purpose of compliance.”

They also include the “integral part of the business” factor reframed to equate “integral” with work that is “critical, necessary, or central” to the company’s principal business. This shifts the focus of analysis to whether the business function that the worker performs is integral rather than whether the individual worker is integral to the organization.

In contrast, the 2021 rule primarily considered only the first and third factors: opportunity for profit or loss and the nature and degree of control. The result was that workers could more easily be classified as independent contractors and denied the benefits and protections that are attendant on the employment relationship.

The 2021 rule focused on the concept of economic dependence. It emphasized that the proper analysis should address whether a worker depends on an employer for work versus whether they depend on the income received and the actual control over the worker, rather than what may be contractually or theoretically possible.

While this interpretation was thought to be more business-friendly, the new rule reinforces the DOL’s pro-employee view of worker classification. Workers who work primarily for one entity, for an extended period of time, performing duties that are also performed by employees (and thus integral to the business) will be much more likely to be seen as employees by the DOL, even if they can demonstrate the opportunity for profit or loss and/or a significant investment in their own business or skills.

For example, we expect to see many service workers such as hair stylists, nail salon technicians, and makeup artists, and laborers such as landscapers, gardeners, and painters to be reclassified as employees. Whether gig economy workers such as delivery and transportation drivers are also subject to reclassification is less clear.

Lyft and Uber, two of the largest gig companies, have already announced they don’t anticipate the new rule will impact classification of their workers. Legal challenges to the new rule are likely to determine the significance of the rule change.

Employers have just 60 days to determine if their workers are properly classified as employees or independent contractors under the Fair Labor Standards Act, which triggers coverage under federal wage-and-hour law. The new rule inevitably will be cited as a persuasive—though not controlling—authority for federal courts considering classification issues.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Karen O’Connor is labor and employment partner at Stoel Rives, with focus on complex employment issues.

Emily Atmore is an associate at Stoel Rives and member of the litigation and labor and employment groups.

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