Earlier this month, the United States Department of Labor issued a final rule on classifying workers under the Fair Labor Standards Act, clarifying the test to determine who is an independent contractor. The FLSA requires covered employers to pay nonexempt employees minimum wage for every hour worked and overtime for every hour worked over 40 in a workweek, as well as certain recordkeeping requirements. Misclassification of employees as independent contractors can result in employer liability under the FLSA (if the worker is actually an employee), and the application of minimum wage and overtime laws to employees who have been mischaracterized. The new rule is intended to clarify who is an independent contractor and prevent these misclassifications.
In today’s gig economy, and especially during the pandemic where workers want or need to exercise a certain level of control over their work, both workers and operators are sure to welcome the new clarity. Even in situations where both sides of the equation appear to want the flexibility of independent contractor relationships, it is important not to try to fit a square peg into a round hole where the relationship is actually a classic employee-employer relationship.
The DOL’s new rule reaffirmed the “economic reality test” to determine whether an individual is in business for him or herself or is economically dependent on a potential employer for work. But as most know, the rule had not been consistently applied by courts or the DOL, necessitating this new rule. With that, the final rule distinguished five distinct factors, instead of using the five or more factors previously used by the courts. The final rule provides the following:
It identified the two “core factors” that carry greater weight in the analysis to question whether an employee is economically dependent on someone else for work, or in business for him or herself:
- The nature and degree of control over the work.
- The worker’s opportunity for profit or loss based on initiative and/or investment.
There are three other factors that serve as additional considerations in the analysis, and can be deemed helpful if the first two factors break even. They are:
- The amount of skill required by the individual for the work.
- The degree of permanence of the working relationship.
- Whether the work is part of an integrated unit of production or to which he renders service.
The purpose of the new rule is to dispense of the balancing test of the old multi-factor test, and lend new focus on core factors. Overall, the actual practice between the worker and operator is more relevant than what the contract provides. The new rule also provides helpful examples to assist in its application.
While the rule is set to take effect March 8, 2021, some have predicted that the Biden administration may do away with the rule entirely in order to expand the definition of employee and make it harder to classify workers as independent contractors. As such, it may be best not to rush in implementing changes in company policies but to continue monitoring the situation.
