January 14, 2021 The U.S. DOL Issues Final Rule Clarifying Independent Contractor Status
KEEPING YOU INFORMED…
We are writing to inform you that, on January 6, 2021, the U.S. Department of Labor (DOL) issued a final rule clarifying the standard for employee versus independent contractor status pursuant to the Fair Labor Standards Act (FLSA). The FLSA neither requires an employer to pay an independent contractor the minimum wage or overtime pay nor keep related records regarding that independent contractor. The new rule, accordingly, focuses on clarifying the relevant factors that the DOL will use to determine whether workers are in fact independent contractor or employees.
The final rule, which takes effect on Monday, March 8, 2021, provides a five-factor economic realities test to analyze the appropriate classification for an employer-worker relationship. Until now, most courts and the DOL considered seven factors which, according to the DOL, were not always consistently interpreted and led to “uncertainty among the regulated community.”
The new rule’s five factors are made up of two “core” factors and three related factors that “may serve as additional guideposts.” The two core factors are the most probative and “each therefore typically carries greater weight in the analysis than any other factor.” If the analysis of both core factors points towards the same classification, then there is a substantial probability that this classification for the worker will be deemed to be correct. The three less probative, guidepost factors, cannot outweigh the combined value of the two core factors. However, the three additional factors may be considered if the two primary factors are not determinative on their own. Below is a summary of the five factors.
Two “Core Factors”
- Nature and Degree of Control Over the Work
This core factor weighs towards independent contractor status if the worker, as opposed to the employer, exercises substantial control over key aspects of his or her work, such as by selecting his or her own projects and/or by setting his or her own schedule.
The final rule also explains the following:
- Requiring workers to comply with the law, follow safe practices, perform timely quality work or adhere to quality control standards does not indicate employer control constituting employee status.
- While a business can compensate workers with benefits that provide a worker with his or her own benefit plan in lieu of cash, making a worker part of an employer’s benefit plan is likely to demonstrate an employment relationship.
- Employee status is not demonstrated in a situation in which a worker has the ability to accept other work, which could include working for a potential employer’s competitor, but chooses not to take it.
- The Individual’s Opportunity for Profit or Loss
This factor weighs towards independent contractor status if the worker has the opportunity to earn profits or incur losses based on his or her exercise of initiative and/or management of his or her own investment. The proper analysis here is whether the worker has an opportunity for profit or loss based upon: (i) the exercise of personal initiative, including managerial skills, judgment, or business acumen; or (ii) the management of investments in, or capital expenditure on, additions such as helpers, equipment, or material to further the work.
The final rule also provides that:
- The individual does not need to have an opportunity for profit or loss based upon both personal initiative and management of investment. A finding of either weighs towards independent contractor status.
- To the extent that the individual is unable to affect his or her earnings, or is only able to do so by working more hours or faster, this factor weighs towards an employee classification.
If the above factors are not uniformly determinative and result in pointing to different classifications, the following factors may serve as additional “guideposts” to aid in the analysis. However, the DOL warns that “these factors are not exhaustive, and no single factor is dispositive.” As a result, it is unlikely that the combined weight of the three guidepost factors will outweigh the combined weight of the new rule’s two core factors.
- The Amount of Skill or Training Required for the Work
This factor weighs towards an individual being an independent contractor if the work requires specialized training or skill that the employer does not provide.
- The Permanence of Employer-Worker Relationship
This factor weighs towards independent contractor if, regardless of the length of the employment arrangement, the duration is defined or sporadic. According to the DOL, this may also include regularly occurring fixed periods of work.
- Relation to the Employer’s Business
This factor weighs towards independent contractor status if the individual’s work can be segregated from the employer’s production process. In contrast, “[this] factor weighs in favor of employee status where a worker is a component of a potential employer’s integrated production process, whether for goods or services. The overall production process need not be a physical assembly line, but it must be an integrated process that requires the coordinated function of interdependent subparts working towards a specific unified purpose.”
Noted above, the new rule goes into effect on March 8, 2021. However, with the newly elected Biden administration, it’s possible the rule’s effective date may be delayed and/or the rule itself may be changed. If, or when, any changes occur, we will update this memorandum accordingly. For now, the five-factor framework laid out by the DOL provides a useful tool to help employers further understand their obligations and employees’ rights pursuant to the FLSA.
If you have any questions regarding the new DOL independent contractor/employee rule, or would like assistance in reviewing a current or potential independent contractor/employee relationship status issue, please contact Alyson Mathews or Michelle A. Mahabirsingh or any of our other attorneys by calling 631-694-2300.
THIS MEMORANDUM IS MEANT TO ASSIST IN GENERAL UNDERSTANDING OF THE CURRENT LAW. IT IS NOT TO BE REGARDED AS LEGAL ADVICE. THOSE WITH PARTICULAR QUESTIONS SHOULD SEEK THE ADVICE OF COUNSEL.
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© Lamb & Barnosky, LLP 2021