Effective March 8, 2021, the Department of Labor enacted a final rule clarifying the standard for employee versus independent contractor status under the Fair Labor Standards Act (FLSA). The final rule was published on January 7, 2021.
“This rule brings long-needed clarity for American workers and employers,” said U.S. Secretary of Labor Eugene Scalia. “Sharpening the test to determine who is an independent contractor under the Fair Labor Standards Act makes it easier to identify employees covered by the (Fair Labor Standards) Act, while recognizing and respecting the entrepreneurial spirit of workers who choose to pursue the freedom associated with being an independent contractor.”
The final rule…
- 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 significant in answering the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself. These two core factors are:
- The nature and degree of control over the work.
- 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:
- The amount of skill required for the work.
- The degree of permanence of the working relationship between the worker and the potential employer.
- 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.
Important to Note
This “final rule” is federal law. While a worker may satisfy the DOL’s new 5-factor test, it will be important to determine how the circumstances fit the applicable state law criteria.
And, this “final rule” may not end up being so final. The rule doesn’t take effect until March 8 so there is time for the new administration, or other federal agencies, to change or withdraw it. Not to mention the fact that court decisions have not been consistent when it comes to determining who qualifies as an independent contractor under FLSA. So, we are in a bit of a “wait and see” moment in time.
Regarding the significance of this rule, Michael Lotto, attorney with Littler, said, “Today’s economic reality is millions of workers must have maximum workplace flexibility. Many of those workers want to be their own boss. Properly structuring those engagement workplace relationships is of utmost importance. Practically, the DOL rule offers a defined road map as to how to accomplish that critical task during a time of workforce transformation.” And he predicted, “At the end of the day, the concepts in this rule will prevail because the American workforce requires it. Laws tend to lag behind an economic reality that exists in real life.” SOURCE: SHRM article 01/07/21
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