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Why Employers Need to Review their FLSA Classifications RIGHT NOW…

October 8, 2020 by in "Two Minute Takeaway"

First Opportunity for Many Employers to Obtain Complete “Good Faith” Defense to Classification Claims 

Employers using independent contractors (“IC’s”) as part of their workforce should immediately review their classification decisions under the Fair Labor Standards Act (“FLSA”) in light of a new rule proposed by the Department of Labor. 

As explained below, employers who reasonably rely upon the new rule to classify workers as IC’s exempt from the FLSA may obtain a valuable complete “good faith” defense to any challenges to the classification.  For employers using IC’s in the workforce, this is a very easy step that may provide valuable legal protection in the future.   

New DOL Rule Governing Classification of Independent Contractors under the FLSA

On September 22, 2020, the Wage and Hour Division of the DOL issued an anticipated new proposed rule governing when a worker is an IC exempt from the minimum wage, overtime, and record-keeping requirements of the Fair Labor Standards Act. 

The new rule proposes a simplified two factor inquiry focusing on whether (1) the worker controls the key aspects of his or her work (hours, method of work, selection and ordering of projects, etc.) and (2) stands to earn a profit or experience a loss from the project.  To the extent either of these factors is present, the worker is more likely to be an exempt IC rather than a covered employee.  The rule is intended to simplify a cumbersome multi-factor “economic reality” test developed by the Courts.  The DOL appears eager to finalize the rule, requesting that all comments be submitted by October 26, 2020.  See here for a longer summary of the new rule

First Written Regulatory Guidance

Importantly, the new rule is the DOL’s first generally applicable regulatory guidance regarding IC classification.  The DOL previously issued only opinion letters and guidance for specific industries (such as sharecroppers).  “The Department has never promulgated a generally applicable regulation addressing the question of who is an independent contractor and, thus, not an employee under the Act.”  See DOL Notice (“Need for Rulemaking”). 

Good Faith Defense

The new existence of the rule finally provides employers with a dispositive “good faith” defense in misclassification cases.  The FLSA provides that employers shall have no liability if their conduct “was in good faith conformity with and in reliance on any written administrative regulation, order, ruling, approval, or interpretation” of the Act by the Administrator of the Wage and Hour Division of the Department of Labor.   See here.  Without prior written guidance on this topic, no dispositive good faith defense was generally available in classification challenges. 

Consequently, employers with IC classification issues should now seek to maximize the benefit of this new rule.  Employers should review their classification decisions and, where appropriate, memorialize that they have reasonably relied upon the DOL’s new rule to classify qualifying IC’s as exempt from the FLSA.  For any employer making significant use of IC’s in the workforce, this should be a relatively easy exercise that may provide a significant benefit in the event of a legal challenge.  Input of counsel may be helpful to properly memorialize the reliance as well as to render deliberations privileged.    

New Rule Vulnerable to Challenge

Unfortunately, the new rule certainly will be challenged in the Courts.  A federal court recently struck down the DOL’s regulations limiting the scope of “joint employer” liability under the FLSA.  The Court held that the DOL’s narrow definition of “employer” and “employee” in that context conflicted with the FLSA.  See here.  The new rule regarding IC’s arguably also relies on a narrow definition of “employee” that may be vulnerable to similar challenge. 

Nevertheless, qualifying employers should act quickly and memorialize their reliance on the new rule.  The FLSA’s good faith defense protects employers even if the relied-upon regulatory action is eventually reversed.  The good faith defense covers any act or omission “notwithstanding that after . . . the enforcement policy is modified or rescinded or determined by judicial authority to be invalid or of no legal effect.”  Consequently, there should be a significant window of time where reliance upon even a flawed rule should provide an important defense.