The line between employee and independent contractor has historically been unclear. However, on January 6, the Department of Labor (DOL) provided clarification on the test for employee versus independent contractor under the Fair Labor Standards Act (FLSA). The “final rule” streamlines and clarifies the test and should “reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility” according to the Wage and Hour Division. The new rule becomes effective March 8, 2021.
The rule confirms that the “economic reality” test is used to determine whether an individual is an independent contractor or an employee. The key question is whether the individual is in business for himself or is economically dependent on a potential employer for work. The rule explains two core factors that are most probative for making this determination:
- The nature and degree of control over the work
- This factor weighs in favor of an individual being an independent contractor to the extent the individual “exercises substantial control over key aspects of the performance of the work, such as by setting his or her own schedule, by selecting his or her projects, and/or through the ability to work for others, which might include the potential employer’s competitors.”
- Alternatively, this factor weighs in favor of an individual being an employee to the extent the potential employer “exercises substantial control over key aspects of the performance of the work, such as by controlling the individual’s schedule or workload and/or by directly or indirectly requiring the individual to work exclusively for the potential employer.”
- The worker’s opportunity for profit or loss based on initiative and/or investment.
- This factor “weighs towards the individual being an employee to the extent the individual is unable to affect his or her earnings or is only able to do so by working more hours or more efficiently.”
If both of these factors point to the same classification, “there is a substantial likelihood that that classification is appropriate.” However, there are three other factors that can provide additional guidance in the analysis, especially if the core factors point to inconsistent classifications:
- The amount of skill required for the work
- If an individual uses skills or training not provided by the potential employer, the individual is more likely an independent contractor.
- The degree of permanence of the working relationship between the worker and potential employer; and
- Employment arrangements that are definite in duration, such as for a specific amount of time or a specific project, or that are unpredictable and sporadic, are more likely to be independent contracting relationships.
- Whether the work is part of an integrated unit of production.
- If an individual is “a component of a potential employer’s integrated production process, whether for goods or services” or is an integral part of the employer’s core business, then the individual is more likely an employee.
The rule also clarifies that the actual practice of the worker and potential employer is more relevant than what may be contractually or theoretically possible. Finally, the rule provides 6 scenarios applying the factors as examples.
*** NOTE: Since this regulation was issued during the final days of the Trump Administration, it is possible, perhaps even likely, that the Biden Administration may seek to delay its implementation. ***
For more information or guidance on how your business may be affected by this new rule, call General Counsel, P.C. today at 703-991-7973.