On January 6, 2021, the U.S. Department of Labor (DOL) announced its final rule to clarify whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The final rule was published in the Federal Register on January 7, 2021 and the effective date is March 8, 2021. You may read the entire rule here.
Since the FLSA does not clearly define the term “independent contractor,” courts and DOL have heavily relied on a multifactor test and subjective evaluation to assess whether a worker is an employee or an independent contractor under the FLSA. These evaluations have largely focused on the “economic reality” or the extent to which the worker is economically dependent on the employer. Historically, if the worker has depended on a particular individual, business, or organization for work, he or she has been considered an employee. If the worker is in business for him or herself, he or she has been considered an independent contractor. The Final Rule introduces a new part to Title 29 of the Code of Federal Regulations clarifying the Department’s interpretation of the FLSA on this issue.
In the Final Rule, DOL:
- Adopts an "economic reality" test to determine a worker’s status as an FLSA employee or an independent contractor. The test considers whether a worker is in business for themselves (independent contractor) or is economically dependent on a putative employer for work (FLSA/w-2 employee);
- Identifies and explained two "core factors," specifically:
- 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.
- DOL found that these factors help determine if a worker is economically dependent on someone else’s business or is in business for themselves.
- Identifies three other factors that may serve as additional guideposts in the analysis, including:
- the amount of skill required for the work;
- the degree of permanence of the working relationship between the worker and the potential employer; and
- whether the work is part of an integrated unit of production; and
- Advises that the actual practices of the putative employer and the worker are more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.
DOL provides six examples analyzing the “economic reality factors” in the Final Rule, §795.115, which may be found in the last two pages of the Rule. The Department acknowledged that it could not provide examples for every conceivable scenario; however the examples provided do cover a variety of industries and specific facts.
DOL states in the Final Rule that it believes the rule “is likely to improve the welfare of both workers and businesses on the whole,” for a variety of reasons which include: increased efficiency of the labor market, greater productivity and decreased litigation for businesses, reduction of misclassification of workers, encouragement of firms to create independent contractors for roles that did not previously exist, the potential for businesses to convert positions in a manner consistent with the rule, by providing legal certainty for the worker if the worker substantially controls the work and has a meaningful opportunity for profit or loss based on their own initiative or investment. DOL believes the clarity provided by this rule will lead to improved worker satisfaction and flexibility.
Remember, under FLSA, covered employers are subject to specific employee recordkeeping requirements and are required to pay nonexempt employees at least the federal minimum wage for every hour worked and overtime pay for every hour worked beyond 40 hours in a workweek. However, workers who are deemed independent contractors are not subject to these recordkeeping, minimum wage, and overtime pay requirements. Accordingly, careful, proper classification of workers is imperative. Furthermore, if you have contracts covered by the Service Contract Act (SCA), this classification takes on additional importance. Learn More
If your company needs assistance understanding its obligations under the FLSA and this new rule, Redstone Government Consulting’s HR Team can help. Contact Us Today
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