On January 6, 2021, the US Department of Labor (DOL) issued long sought-after clarity on the legal distinction between independent contractors and employees under the Fair Labor Standards Act (FLSA). The rule is scheduled to take effect on March 8, 2021.
The rule reaffirms the “economic reality” test to determine whether an individual is in business for him or herself (and therefore an independent contractor) or is economically dependent on an employer for work (and therefore an employee). The DOL lays out five factors to consider in making this determination. The list is non-exhaustive and no single factor is dispositive; however, the first two are considered to hold the most weight – such that, if the first two factors are both in favor of one status or the other (employee or independent contractor), the remaining factors will not be relevant in most cases.
- The nature and degree of the individual’s control over the work. Does the worker exercise substantial control over key aspects of the performance of his/her work?Does the worker set his/her own schedule? Select his/her own projects? Work for others?
- The individual’s opportunity for profit or loss. Does the worker have an opportunity to earn profits or incur losses based on his/her own exercise of initiative or management of his/her investment in or capital expenditure on helpers, equipment, or material?
- The amount of skill required for the work. Does the worker require specialized training or skill not provided by the hiring entity?
- The degree of permanence of the working relationship. Is the work, by design, definite in duration or sporadic?
- Whether the work is part of an integrated unit of production. Is the work a component of the hiring entity’s integrated production process for goods or services?
Although this guidance is aimed at reducing worker misclassification, there is uncertainty over whether the Biden administration will accept, rescind or revise this rule before it goes into effect. As such, employers may wish to review independent contractor classifications in accordance with this new rule but wait until late February or the first week of March before making changes. If you have any questions about how this new rule may affect you or your workforce, contact Nicole Gardner or Erin Ball.