This blog was written by Scott Ortes, Vice President of Operations for Suna Solutions. In it, he provides a deep dive into the evolving federal and California-specific policies shaping worker classification compliance, including what the new “economic realities” test means, why staffing firms must be treated differently than gig economy platforms, and what enforcement looks like in states like California.
The landscape of worker classification is in a state of flux, presenting a complex and often contradictory set of challenges for employers. At the federal level, a new administration is signaling a more business-friendly approach to independent contractor classification, rolling back a recent rule and reverting to an older, more flexible test. Simultaneously, in states like California, the focus is squarely on enforcement, with a significant investment aimed at prosecuting wage theft and protecting workers’ rights. This dual-track environment requires employers to be more vigilant than ever, understanding both the shifting federal policy and the intensifying state-level scrutiny.
The Federal Shift: A Return to the “Economic Realities” Test
In a notable departure from the previous administration’s stance, the current government is moving toward a more favorable view of independent contractor classification. The Biden administration’s 2024 Rule, “Employee or Independent Contractor Classification under the Fair Labor Standards Act,” had reinstated the six-factor “totality of the circumstances” test, which many employers found to be a more burdensome standard. This rule faced immediate legal challenges, and the Department of Labor (DOL) has since taken steps to reevaluate its position.
The DOL’s recent actions, including postponing oral arguments in pending cases and issuing Field Assistance Bulletin No. 2025-1, signal a clear shift. This bulletin announced a pause in the enforcement of the 2024 Rule and a return to earlier guidance: Fact Sheet #13 (July 2008) and Opinion Letter FLSA2025-2.
Fact Sheet #13 outlines the “economic realities” test, a multi-factor analysis to determine if a worker is an employee or an independent contractor. The factors considered are:
- The worker’s opportunity for profit or loss.
- The investments made by the worker and the employer.
- The permanence of the work relationship.
- The nature and degree of control exercised by the employer.
- Whether the work is integral to the employer’s business.
- The worker’s skill and initiative.
This test is generally seen as more flexible, and the DOL has clarified that factors like the work location or the lack of a formal agreement are not determinative.
Further reinforcing this stance is Opinion Letter FLSA2025-2, which specifically addresses the employment status of individuals working through Virtual Marketplace Companies (VMCs). Expanding upon earlier guidance, the DOL’s Wage and Hour Division (WHD) concluded that providers for these platforms are generally independent contractors. The analysis highlighted that these workers are typically not interviewed or trained by the VMC, have discretion over their work schedule, and often work across multiple platforms. The WHD found that the VMC’s core business is to facilitate connections, not to provide the services themselves, and therefore the providers were not economically dependent on the platform. This analysis, using the economic realities test, found that VMC workers were not covered by FLSA protections like minimum wage and overtime.
This new guidance reflects an effort to revive the 2021 independent contractor regulation, which proposed a simplified approach focusing on two core factors: control and opportunity for profit or loss. While that rule was never implemented, the current guidance points toward a framework where if both core factors point to the same classification, it is likely the correct one.
A Different Tune: The Staffing Company Model
While the new guidance may favor the independent contractor classification for VMC workers, it’s crucial to understand the distinction with other business models, particularly staffing companies. Unlike VMCs, staffing firms’ business model is built around placing temporary workers, making the worker’s services central to their operations.
Staffing firms actively recruit, hire, train, and assign workers, and their relationship with these workers often has a degree of permanence. The firms exercise significant control over assignments and may even restrict concurrent employment. Most importantly, temporary workers at staffing firms do not have meaningful opportunities for profit or loss independent of their wages, which are set by the staffing firm. The staffing firm acts as the employer of record, handling wage payments, taxes, and benefits. This structure typically places staffing firms within the scope of the FLSA, entitling their workers to minimum wage and overtime protections.
California’s Proactive Enforcement: A Tale of Two Jurisdictions
While federal policy is shifting, the State of California is moving in the opposite direction, doubling down on worker protections. The California Department of Industrial Relations (DIR) and the Labor Commissioner’s Office have launched a Workers’ Rights Enforcement Grant Program, backed by an $18 million investment. This program provides funding to local public prosecutors—such as district attorneys and city attorneys—to prosecute wage theft.
This significant investment is a direct response to the prevalent issue of wage theft, which includes minimum wage and overtime violations, failure to provide meal and rest breaks, and other forms of unpaid compensation. The goal is not just to prosecute violators but also to deter employers from engaging in such illegal practices. This aggressive stance is a stark reminder that even as federal rules may lean toward flexibility, state-level enforcement can be a powerful force.
California employers must be particularly cautious. The state has identified “Red Flag Tips” for common wage and hour claims, including minimum wage and overtime violations, failure to pay for all hours worked, and meal and rest break violations. This emphasis on enforcement means that California employers, regardless of the federal guidance, must be diligent in their classification and pay practices.
Business Implications and the Path Forward
The divergence between federal and state policy creates a challenging environment for businesses. While the federal guidance under the new administration may reduce the likelihood of certain independent contractors being reclassified as employees, the risk of legal challenges remains. Private litigants may still attempt to invoke the 2024 Rule, and, more importantly, state laws and enforcement efforts, especially in a state like California, can supersede federal guidance.
For employers, the most prudent course of action is to remain cautious. Unless a worker’s independent contractor status is clearly satisfied under all applicable tests, it may be safer to treat them as an employee to minimize potential legal risk. The new federal guidance is a welcome development for many businesses, but it is not a blanket green light. The landscape of worker classification is dynamic, and employers must navigate it with a clear understanding of both the federal and state-level rules and risks.