DOL Clarifies FLSA Standard for Employee vs. Independent Contractor
The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping, and youth employment standards for employees in the private sector and in Federal, State, and local governments. The FLSA requires employers to pay an employee a federally mandated minimum wage and overtime pay, and requires employers to keep records regarding that employee. However, businesses do not have to meet those same obligations for independent contractors. Therefore, it is important that companies classify workers correctly as either employees or independent contractors.
On January 6, 2021, the U.S. Department of Labor (DOL) issued a Final Rule that clarifies the standard used to determine whether an individual is an employee or independent contractor under the FLSA. The Final Rule will go into effect March 8, 2021.1
In the Final Rule,2 the DOL:
- Reaffirms an “economic reality” test to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (employee).
- Identifies two “core factors” that are most probative to, and carry greater weight, in determining whether there is economic dependence:
- The nature and degree of the worker’s control over the work.
- The worker’s opportunity for profit or loss based on initiative (such as managerial skill, business acumen, or judgement) and/or investment in or capital expenditure on the work (such as for helpers, equipment, or material).
- 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. The factors include those listed below, along with additional factors that may be relevant by some away indicating that the individual is in business for him or herself, as opposed to being economically dependent on a potential employer:
- The amount of skill required for the work.
- The degree of permanence of the working relationship between the worker and the potential employer.
- The actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
- Provides six fact-specific examples applying the factors.
Notably, the Wage and Hour Division, under President Biden’s new administration has postponed the effective date of the Final Rule to solicit additional comments to support a potential revision of the rule.3
It can be difficult to discern whether an employee or independent contractor classification is appropriate. This determination cannot be based on an isolated factor or upon a single characteristic, but it instead depends upon multiple factors and circumstances of the worker’s actual activities and practices. It is critical that a company correctly identifies its individual workers as either employees or independent contractors. When a worker claims that they have been misclassified, this can lead to significant exposure to unpaid minimum wage, overtime, and other benefits typically only granted to employees.
The issuance of the DOL’s Final Rule may be a good time for your company to review and reevaluate its employee and independent contractor classifications. If you would like help doing so, or if you have any questions or concerns about the classification of workers under the DOL’s new Final Rule, our Employment and Workforce Management team at Maddin Hauser is here to help.
1 UPDATE – As of February 19, 2021, the U.S. Department of Labor’s Wage and Hour Division has delayed the effective date of the Final Rule in order to allow an additional opportunity for review and consideration of the rule.
3 https://fas.org/sgp/crs/misc/IN10611.pdf and https://fas.org/sgp/crs/misc/R42612.pdf