Employers often ask, “Can this worker be an independent contractor?” The answer is often unclear due to the different tests for employee versus independent contractor status, which vary between federal circuit courts and from state to state. In the end, the answer typically depends on how much risk the employer is willing to take. In an effort to simplify the answer, the U.S. Department of Labor (DOL) announced on January 6, 2021, a final rule pertaining to employee versus independent contractor status under the Fair Labor Standards Act (FLSA). The rule is scheduled to take effect on March 8, 2021.
With the rule, the DOL intends to address a critical issue for many workers and employers, particularly in the growing “gig” economy. According to Eugene Scalia, the current Secretary of Labor, issuance of the rule was driven in part by the passage of laws such as California’s AB-5, which requires many businesses to change worker classifications and identify workers as employees rather than independent contractors.
According to Secretary Scalia, the rule provides:
“guidance, clarifying and harmonizing principles courts have used for decades to determine who is an ‘employee’ under the FLSA. The rule asks whether a worker depends on a business or organization for the opportunity to work, or if instead she’s essentially in business for herself. If the former, she’s an employee; if the latter, an independent contractor.”
In essence, the final rule focuses on “who is the boss” by “reaffirm[ing] an ‘economic reality’ test [adopted by many federal courts] 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).”
The Core Factors
The rule provides two “core factors” that are key to determining whether a worker is economically dependent” or “in business for him or herself”:
- The nature and degree of control over the work.
- The worker’s opportunity for profit or loss based on initiative and/or investment.
Drawing from factors in court decisions and prior guidance, the DOL’s rule identifies three other factors that may be used when analyzing a worker’s status. They are:
- 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.
The rule provides examples of the factors in application and will be published in the Federal Register on January 7, 2021.
Whether this rule survives the new administration is yet to be seen.