Today, the U.S. Department of Labor announced the impending publication of a new rule clarifying the circumstances under which a worker should be classified as an employee or an independent contractor under the Fair Labor Standards Act (“FLSA”). Because an employer’s minimum wage, overtime, and record keeping obligations under the FLSA depend on whether a worker is an employee or an independent contractor, it is important to ensure that workers are correctly classified.
The new rule, which goes into effect on March 8, 2021, reaffirms that a worker is an employee if, as a matter of economic reality, the worker is economically dependent on the employer for work. Historically, the determination of whether a worker is economically dependent on an employer has been based on a list of factors, including, but not limited to: (1) the nature and degree of the employer’s control over the worker’s work; (2) the worker’s opportunity for profit and loss; (3) the amount of skill required to perform the work; (4) the permanence of the relationship between the worker and the employer; and (5) whether the work is part of an integrated unit of production.
The new rule clarifies that the first two factors—the nature and degree of control over the work and the worker’s opportunity for profit and loss—are the most important factors in determining whether a worker is an employee or independent contractor.
Under the new rule, if a worker sets his or her own schedule, selects his or her own projects, has the ability to work for others (including competitors), or otherwise exercises substantial control over key aspects of the performance of work, the worker is more likely to be an independent contractor. In contrast, if the company controls the worker’s schedule and workload, or directly or indirectly requires the worker to work exclusively for the company, the worker is more likely to be an employee.
Similarly, if a worker has an opportunity to earn profits or incur losses based the exercise of his or her own initiative (such as managerial skill or business judgment) or the management of investments in or capital expenditures on helpers, equipment, or materials, the worker is more likely to be an independent contractor. In contrast, if a worker either cannot affect his or her earnings or can do so only by working faster or for more hours, the worker is more likely to be an employee.
Although the new rule still permits consideration of the other factors identified above, it makes clear that those factors are highly unlikely, either individually or collectively, to outweigh the combined probative value of the two core factors. Accordingly, going forward, companies should focus on the nature and degree of the company’s control and the worker’s opportunity for profit and loss when classifying a worker as an employee or independent contractor.
Importantly, when evaluating a worker’s economic dependence, the parties’ actual conduct is often more important than the terms of any contractual relationship between the company and the worker. Thus, whether a company actually supervises or disciplines a worker is more relevant than whether a company has a contractual right to do so. Likewise, the fact that a worker may have the legal right to work for a competitor of the company is less meaningful if the worker is practically prevented from doing so.
The new rule, which may be found at the following link, also provides some examples of how these factors may be applied in different industries to determine if a worker is an employee or an independent contractor:
Despite the clarification provided by the new rule, whether a company should classify a particular worker as an employee or an independent contractor will undoubtedly remain a complicated issue. To minimize the potential liability from improperly classifying their workers, when in doubt, companies that use independent contractors should continue to consult with appropriate legal counsel.
The Hall Estill Employment Team has experience handling these issues and is ready to assist you. If you need any assistance or have any questions regarding other issues, please contact your Hall Estill Attorney directly.
