Independent Contractor Status Under The Fair Labor Standards Act 

On January 6, 2021, the U.S. Department of Labor (“DOL”) issued a final rule clarifying the standards to determine employee or independent contractor status under the Fair Labor Standards Act.  Although the DOL has previously issued guidance on classification, this is the DOL’s first formal rulemaking on the subject. The new rule takes effect on March 8, 2021, however, its future remains uncertain because it is anticipated that the Biden Administration has reportedly intervened to ask the Department of Labor to put on hold all new regulations to permit a review by the new administration.  

“The new regulation provides a balanced analysis for determining when a worker is an independent contractor or employee under the FLSA,” Glenn Spencer, U.S. Chamber of Commerce senior vice president of employment policy, said. “By giving employers and employees greater clarity, and providing a modern interpretation of what it means to be an independent contractor, the regulation will increase the opportunities for single parents to control their schedules and raise their kids, ex-offenders to reenter the workforce, and help military spouses generate earnings as they move from place to place.”

Final Rule on Classification of Workers as Employees or Independent Contractors Under The Fair Labow Standards Act

The Final Rule includes the following clarifications:

  • 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 (FLSA employee). 
  • 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: (a) the nature and degree of control over the work; and (b) the worker’s opportunity for profit or loss based on initiative and/or investment.
  • 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 are (a) the amount of skill required for the work; (b) the degree of permanence of the working relationship between the worker and the potential employer; and (c) whether the work is part of an integrated unit of production.
  • 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.

Ensuring The Proper Classification: Employee or Independent Contractor

The DOL rule on independent contractors is in addition to federal and state laws. The final rule does not prevent states and localities from imposing more stringent classification requirements. Employers must follow the rules or laws that create the most protection for employees. In light of the changing landscape of this rule, as well as state-specific considerations, employers are cautioned to be diligent about worker classification to ensure compliance with all current federal and state laws. Employers should take steps now to ensure the proper classification for their workers and thus avoid future liability for misclassification. However, employers must remain mindful that this rule can be delayed, modified, or fully rescinded by the Biden administration. We will monitor this rule to determine whether employers will benefit from the DOL’s first rule on this subject.

Santomassimo Davis LLP specializes in being the premier Outside General Counsel™ to mid-cap businesses.  The issues discussed in this article are typical of those that we handle for our clients. We help them navigate the legal and regulatory matters affecting their businesses.  For help with these issues or to learn more about the Outside General Counsel™ solution, please contact us at OGCSolutions.com.

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