DOL Announces Final Rule on Standard for Employees vs. Independent Contractors Under FLSA
Chicago, Ill. (January 6, 2021) - The US Department of Labor (DOL) announced this morning, January 6, its final rule clarifying the standard for employee versus independent contractor under the Fair Labor Standards Act (FLSA). The effective date of the final rule is March 8, 2021, giving the incoming Biden administration time to withdraw it if it so chooses.
The DOL’s guidance reaffirms an “economic reality” test, similar to what the National Labor Relations Board did in January 2019, to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (employee). In other words, if a worker is dependent on the employer for work, then the worker is classified as an employee. By contrast, if a worker is in business for themselves as a matter of economic reality, then they are an independent contractor.
The DOL regulations identify five factors to guide this analysis, although the regulations specifically provide that the first two “core” factors are the most probative and carry more weight than the remaining factors. In the event that the first two factors align and suggest the same classification, then there is a "substantial likelihood" that the classification is correct notwithstanding the remaining factors.
The nature and degree of the individual’s control over the work: This factor supports the individual being an independent contractor to the extent that the individual, as opposed to the potential employer, exercises substantial control over key aspects of the performance of the work. This factor weighs whether workers set their own schedule, select their own projects, and whether they have the ability to work for their employer's competitors. It is not critical to require an individual to comply with contractual terms typical of a business relationship, i.e., requiring insurance, meeting quality control or health and safety standards.
The individual’s opportunity for profit or loss based on initiative or investment: This factor analyzes whether workers have the potential to earn profits or incur losses based on their own initiative, which includes managerial skill, business acumen, or judgment. This factor also evaluates the impact on a worker's revenue through the worker's investment in his or her business or the worker's control of costs and expenditures. The inability of a worker to change his or her earnings through initiative (other than working more hours) suggests an employment relationship.
The final three factors provide “additional guideposts,” and are of particular use when the two core factors above do not point to the same classification:
- The amount of specialized training or skill required for the work performed that the potential employer does not itself possess. If the employer provides little or no training and the worker provides all of the skills necessary for the job, that would suggest the individual is an independent contractor.
- The degree of permanence of the working relationship between the individual and the potential employer, focusing on the continuity and duration of the relationship, and weighing towards independent contractor status if the relationship is definite in duration or sporadic.
- Whether the work is part of an integrated unit of production, which centers on whether an individual works in circumstances analogous to a production line, i.e., if the individual’s responsibilities are an integral part of a broader production process, then an employment relationship is indicated.
The DOL emphasized that the actual practice of the individual and the potential employer is more relevant than what may be contractually or theoretically possible.
Stephen L. Sitley, Partner
Mary Smigielski, Partner