UPDATE: On January 26, 2021, the U.S. Department of Labor announced that it is withdrawing opinion letter FLSA2021-8. According to the DOL, this letter was issued “prematurely” because it was “based on rules that have not gone into effect.” Thus, DOL has stated that as of January 26, 2021, the letter may not be relied upon as a statement of agency policy.

*  *  *

The United States Department of Labor’s Wage and Hour Division (WHD) recently issued a letter responding to a food manufacturer’s request for an opinion on whether certain distributors of the manufacturer’s perishable products are employees or independent contractors under the Fair Labor Standards Act (FLSA).

In its January 19, 2021 opinion letter, the WHD analyzed the characteristics of the manufacturer-distributor relationship under the five-factor economic-reality rubric enunciated in the DOL’s March 8, 2021, final rule clarifying the standard for determining whether a worker is an employee or independent contractor under the FLSA.¹  The WHD concluded that in this specific scenario, the distributors are independent contractors, as both of the core factors regarding economic dependence – control and opportunity for profit or loss – indicate independent contractor status, “and the non-core factors do not indicate a reason to disagree with that conclusion.” 

Economic-Reality Test

The economic-reality test as set forth in the final rule provides two core factors that are integral, or most probative, in determining employee versus independent contractor status:

• The nature and degree of control over the work
• The worker's opportunity for profit or loss based on initiative and investment

Three other factors are provided to serve as “guideposts” in the analysis, particularly when the two core factors point in different directions:

• The amount of skill required for the work
• The degree of permanence of the working relationship between the worker and the potential employer
• Whether the work is part of an integrated unit of production

Importantly, “the actual practice of the parties involved is more relevant than what may be contractually or theoretically possible.”²

Analysis of Core Factors

In this case, the WHD concluded that the core “control” factor indicates independent contractor status because distributors set their own work schedule, choose their own assignments, work with little or no supervision, and can work for others, including the manufacturer’s competitors.

The WHD also concluded that the “opportunity for profit or loss” factor indicates independent contractor status because the distributor has “the opportunity to earn profits or incur losses based on its exercise of initiative (such as managerial skill or business acumen or judgment)” and/or “management of its investment in or capital expenditure on, for example, helpers or equipment or material to further its work.” The WHD affirmed its prior guidance that investment and opportunity for profit or loss should be considered in tandem, and the worker’s investments alone – not the investments in comparison to the employer’s – matter when considering investment. In this case, the distributors have the discretion to determine a variety of factors affecting their profit or loss, including: which and how many products to purchase; which customers to solicit, serve, or no longer serve; the prices they seek to charge; what types of vehicles and storage space to invest in; and which assistants, if any, (and technology) to employ.

Analysis of Guidepost Factors

Skill: the WHD found it notable that the manufacturer offers orientation, training, and continued assistance to the distributors, but that the distributors may freely decline it, and that the distributors undertake a variety of tasks with a wide range of required skill. This led the WHD to conclude that “[s]kill is roughly neutral.”

Permanence: the WHD inferred that some distributors may have continuous relationships with the manufacturer and noted that there are limits on the manufacturer’s ability to terminate their distributor relationships. This led the WHD to conclude that “[p]ermanence may slightly weigh in favor of employee status.”

Integration: the WHD highlighted that “this factor analyzes not whether the distributors’ work is important to the manufacturer’s business, but whether it ‘is segregable from the [manufacturer]’s production process.’” In this case, the distributors “play no role” in the production of the manufacturer’s perishable food products, instead focusing on purchasing and reselling them; in other words, the distributors themselves are consumers of the manufacturer’s products. This led the WHD to conclude that “[i]ntegration suggests that the distributors are independent contractors.”

None of these conclusions indicated to WHD a reason to disagree with the conclusion reached after analysis of the core factors.

Employer Takeaways

The contours of the economic-reality rule are becoming clearer with each opinion letter issued by the WHD. Employers should make sure they are monitoring the WHD’s guidance on this topic to inform their decisions regarding employee and independent contractor classification as the Biden Administration may influence material changes in the WHD’s guidance. This particular opinion letter provides insight into the food manufacturer-distributor relationship, particularly to the extent the relationship mirrors the factual scenario at play here, but also to other similarly structured relationships outside of this industry.