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The Fair Labor Standards Act (FLSA): Who Benefits and Who Doesn’t

By: David Ostrowsky

It’s hard to fathom today, but less than a century ago, America was a country in which elementary-school-aged children were accustomed to laboring in coalmines, glass factories, and shipyards; an untold number of employees earned less than $1 per day; a typical workweek consisted of six 12-hour shifts. Such was life for tens of millions of Americans barely scraping by during the depths of the Great Depression before FDR implemented his landmark New Deal, which, among other initiatives, provided workers greater protection with the passage of the Fair Labor Standards Act (FLSA).

Although the FLSA, signed into law on June 25, 1938, did safeguard future generations of Americans from the perils of unfettered capitalism, the statute has not remained immutable for the past eighty-four years. At its core, the FLSA entitles American workers to a minimum wage and overtime pay. Contracted workers, that is. Independent contractors, in contrast, are not entitled to such rights. Unsurprisingly, there has been great ambiguity concerning the differentiation between an independent contractor and employee, particularly amidst the recent presidential transition.  

Under the Trump administration in January 2021, a rule was passed that focused on two core factors (control over the work and opportunity for profit or loss) in determining the classification of an independent contractor. Some believed that this rule enabled employers to misclassify their workers as “freelance contractors” in order to eschew regulations leading to higher payroll taxes and benefit expenses. Last month, the U.S. Department of Labor (DOL), behind the strong backing of the Biden administration, did in fact issue a proposed rule change to lower the threshold for who can be deemed an employee. (This is the DOL’s second attempt to amend the law after its 2021 proposal was denied by a federal court.) The underlying goal of the proposal is to help millions of American employees working in a gig economy (i.e., janitorial employees, construction workers, Uber drivers) reap the benefits of the FLSA, namely minimum wage protection, overtime pay, paid leave, and perhaps even health benefits.

So, what exactly does the new proposal entail? In an effort to ensure that no one factor has a predominant influence, the following six-factor economic reality test was presented as a means of identifying whether an employee is economically dependent on their employer:

  1. Opportunity for profit or loss depending on managerial skill; 
  2. Investments by the worker and the 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 employer’s business; and 
  6. Skill and initiative. 

If this newly proposed rule is finalized, and that will not be known until later this year, it would essentially reinstate the “traditional” economic realities test previously used under the auspices of the FLSA. While many in the Biden administration are in support of reinstatement, there is a sizable contingent of detractors who fear that an expanded set of factors will leave businesses rudderless in their attempts to classify employees.

Though some industries will remain unaffected by the forthcoming decision, many that depend on independent contractors to operate their respective businesses, most notably construction, trucking, and ridesharing, are closely monitoring this issue of worker classification, one that could leave them facing new legal liabilities.