On January 7, 2021, the U.S. Department of Labor (DOL) published a final rule in the Federal Register that clarifies how to determine who is an independent contractor and who is an employee for purposes of the Fair Labor Standards Act (FLSA).
This is an important issue because independent contractors are not subject to the FLSA’s minimum wage and overtime requirements. Unfortunately, court decisions and past DOL determinations as to who is or is not an independent contractor under the FLSA have often been inconsistent. Opportunities to be in business for oneself have increased dramatically in the gig economy, which has further fueled the need for a straightforward test that can be meaningfully applied in the modern workplace.
Relying on precedent from the Supreme Court of the United States, the DOL’s final rule adopts an “economic reality” test designed to address the ultimate question of whether, as a matter of economic reality, the worker is in business for him or herself (and thus an independent contractor not covered by the FLSA) or economically dependent on another (and thus an employee covered by the FLSA).
The final rule is directed to all types of businesses, not just gig businesses. Consistent with the proposed rule that the DOL published in the Federal Register in September 2020, the final rule identifies and explains two “core factors” that are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself. Those two core factors are (1) “the nature and degree” of control over the work; and (2) “the worker’s opportunity for profit or loss” based on initiative and/or investment.
The final rule also identifies “three other factors that may serve as ‘additional guideposts’ in the analysis,” particularly when the two core factors do not point to the same classification. Those three other factors are (1) “the amount of skill required for the work”; (2) “the degree of permanence of the working relationship between the individual and the potential employer”; and (3) “whether the work is part of an integrated unit of production.”
Under the final rule, “the actual practice” of the worker and the potential employer “is more relevant than what may be contractually or theoretically possible.”
The DOL also includes six fact-specific examples in the final rule applying the factors.
The final rule is scheduled to become effective on March 8, 2021, which will be after the Biden administration takes office. Thus, despite the fact that it is a “final rule,” employers still will want to monitor the rule’s future.