Department of Labor Issues Final Rule on Independent Contractor Status
Director of Employee Benefits Compliance
On January 6, 2021, the Department of Labor (DOL) issued a final rule regarding the interpretation of independent contractor status under the Fair Labor Standards Act (FLSA). This final rule focuses on clarifying and minimizing the applicable tests to determine if an individual is an independent contractor or a FLSA employee of the employer. This rule is effective beginning March 8, 2021.
The FLSA requires covered employers to pay non-exempt employees a minimum of Federal minimum wage and overtime for hours worked over 40 hours in a workweek and maintain records regarding employees. Independent contractors would not be considered employees and therefore the employer would not be subject to the FLSA requirements as to the independent contractors. Historically, the determination as to whether an individual was an independent contractor was determined by the level of economic dependence the individual has on the business or organization.
This final rule clarifies the determination of economic dependence into five concise factors with emphasis on two of those factors that carry greater weight in the analysis: the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss.
This final rule applies to all industries and should be used by employers, employees and the courts to understand the requirements under the FLSA.
“Economic reality” Test
The final rule states that the economic reality or dependence test is the only applicable test to determine independent contractor status. This test determines if the individual is actually in business for him or herself as opposed to being an employee of the employer.
Although the final rule provides five distinct factors to consider in determining independent contractor status, two core factors carry the most weight in the analysis. These core factors are:
- The nature and degree of control over the work: If an individual exercises substantial control over their own performance of the work – setting his or her own schedule, selecting his or her projects and the ability to work for other employers – the individual is most likely an independent contractor.
If the employer requires the individual to comply with legal requirements, satisfy health and safety standards, carry insurance, meet deadlines or quality control standards or satisfy other contractual terms these requirements do not constitute the required “control” necessary to deem the individual an employee.
- The individual’s opportunity for profit or loss: If an individual has the opportunity to earn profits or incur losses based on his or her exercise of initiative (control of work) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work, the individual is most likely an independent contractor.
While an individual’s control over their work and their personal financial stake are both considerations, an individual does not need to have an opportunity for profit/loss in both respects for an individual to be considered an independent contractor. If an individual is not able to affect their earnings or can only do so by working more hours or raising their personal production, this may indicate they are an employee.
If both of these factors point toward one conclusion, it is not necessary to take the additional factors into consideration.
Additional factors to be considered
- Amount of skill required for the work:
- More likely an independent contractor: the work requires specialized training or a skill that the potential employer does not provide.
- More likely an employee: the work at issue requires no specialized training or skill and/or the individual is dependent upon the potential employer to equip him or her with any skills or training necessary to perform the job
- Degree of permanence of the working relationship
- More likely an independent contractor: the work relationship is by design definite in duration or sporadic, which may include regularly occurring fixed periods of work, although the seasonal nature of work by itself would not necessarily indicate independent contractor classification
- More likely an employee: the work relationship is indefinite in duration or continuous
- Work is part of an integrated unit of production (different from the importance of the work to the business)
- More likely an independent contractor:the work is separate from the employer’s production process
- More likely an employee: the work is a component of the employer’s integrated production process for a good or service.
Other factors may be relevant but only if those factors indicate whether an individual is in business for him or herself as opposed to being economically dependent on the employer.
Actual practice of the parties involved is more relevant in determining economic dependence rather than what might be possible in theory or by contract. The rule provides the following examples:
- An individual’s theoretical abilities to negotiate prices or to work for competing businesses are less meaningful if, as a practical matter, the individual is prevented from exercising such rights.
- A business’ contractual authority to supervise or discipline an individual may be of little relevance if in practice the business never exercises such authority.
The final rule from the Department of Labor should help organizations if they have questions about the status of an independent contractor per Fair Labor Standards Act (FLSA). If your organization has questions about the application of this rule, you should work with your legal counsel or a labor law expert.