DOL Announces Final Rule on Classification as Independent Contractor or Employee

By Susan Milner Parrott and J. Travis Hockaday

On January 7, 2021, the federal Department of Labor (DOL) published its final rule for determining whether a worker is an independent contractor or an employee for purposes of the Fair Labor Standards Act (FLSA). According to the U.S. Secretary of Labor, the rule will make it "easier to identify employees covered by the Act, while recognizing and respecting the entrepreneurial spirit of workers who choose to pursue the freedoms associated with being an independent contractor." USDOL Press Release 1-6-2021.

The FLSA requires that non-exempt employees be paid at least minimum wage and be paid overtime for every hour over 40 worked in a workweek. But, a worker who performs services as an independent contractor is not entitled to such protections. The DOL and courts have applied an "economic reality" test to determine the appropriate classification of workers under the FLSA. Generally, workers who are in business for themselves are independent contractors whereas workers who are economically dependent on a putative employer are employees. The DOL believes that the new rule reaffirms the "economic reality" test and:

sharpens this inquiry into five distinct factors, instead of the five or more overlapping factors used by most courts and previously the Department. Moreover, consistent with the FLSA’s text, its purpose, and the Department’s experience administering and enforcing the Act, the final rule explains that two of those factors—(1) the nature and degree of the worker’s control over the work and (2) the worker’s opportunity for profit or loss—are more probative of the question of economic dependence or lack thereof than other factors, and thus typically carry greater weight in the analysis than any others.

86 Fed. Reg. 1168, Jan. 7, 2021.

The new rule refers to these two factors—the worker’s control over the work and the worker’s opportunity for profit or loss—as "core" factors and explains that, "Given these two core factors’ greater probative value, if they both point towards the same classification, whether employee or independent contractor, there is a substantial likelihood that is the individual’s accurate classification." 86 Fed. Reg. 1168, 1246-1247, Jan. 7, 2021, to be codified at 29 C.F.R. Part 795. The rule delineates three additional factors that may be applied to the determination if the "core" factors don’t point to the same classification. Those factors are: 

• The amount of skill required for the work;
• The degree of permanence of the working relationship between the individual and the potential employer; and
• Whether the work is part of an integrated unit of production.

The rule also provides that actual practices of the parties is more relevant than "what may be contractually or theoretically possible." Id.

The new rule applies only to the DOL’s interpretation of worker classification for purposes of the FLSA and would not affect state or local law classification requirements. The rule is scheduled to become effective on March 8, 2021 and, although it may be subject to limitation by the incoming Biden DOL or legal challenge, businesses should consider how the rule might affect their classification of workers.

If you have any questions about this alert, please contact the Smith Anderson lawyer with whom you normally work.