While states have been busy passing their own independent contractor misclassification laws, on January 7, 2021, the U.S. Department of Labor (DOL) published its final rule adopting a streamlined “economic reality” test to determine a worker’s status as an employee or an independent contractor for purposes of the Fair Labor Standards Act (FLSA). The new rule does not become effective until March 8, 2021, leaving open an opportunity for withdrawal by the Biden Administration.
Until now, the DOL and courts have been using various multifactor balancing tests to make the determination of whether a worker is an employee or independent contractor under the FLSA. The new regulations retain the aspect of a multifactor test but put the majority of the weight on two “core factors”:
- the nature and degree of the worker’s control over the work, and
- the worker’s opportunity for profit or loss based on initiative and/or investment.
The new test puts the emphasis on the worker, rather than the employer’s work structure. Thus, the core factors look to whether the worker has freedom to determine when to work, on what projects and for whom and to the impact of the worker’s own actions on his or her earnings. If both core factors suggest the worker is an employee, this is unlikely to be outweighed by any other factors in favor of independent contractor classification. However, three additional factors may serve as “guideposts,” particularly where the core factors are inconclusive:
- the amount of skill required for the work,
- the degree of permanence of the working relationship between the worker and the putative employer, and
- whether the work is part of an integrated unit of production.
Other factors also may be considered to the extent they inform the ultimate question of whether the individual is, as a matter of economic reality, dependent on the employer or in business for him- or herself. Significantly, the DOL made clear in its commentary that simply offering health, retirement or other benefits to a worker does not necessarily indicate employment status, provided that the benefits are not the same as those offered to employees and the other factors continue to support the conclusion that the worker is an independent contractor.
The new regulations explain that, in determining whether a worker is an employee or an independent contractor, actual practice is more relevant than what may be contractually or theoretically possible. The regulations provide six examples (CLICK HERE TO VIEW) demonstrating how the new test may be applied under various factual situations.
While NFC has been recommending that employers revisit their independent contractor classifications due to changing state laws, this final DOL rule underscores the necessity of that task.
