Department of Labor Issues New Rule on Independent Contractors
The United States Department of Labor (DOL) has issued a final rule for determining whether someone is an independent contractor for purposes of the Fair Labor Standards Act (FLSA). The rule will be published in the Federal Register on January 7, 2021, and will become effective in 60 days, on March 8, 2021.
The FLSA requires employers to pay their nonexempt employees the federal minimum wage for every hour worked as well as overtime pay – time and a half – when employees work more than 40 hours in a workweek. These requirements do not apply, however, to workers performing services as independent contractors.
The question of whether a worker is an employee subject to the FLSA or whether the individual is an independent contractor has been a frequent subject of dispute, resulting in both individual lawsuits and class or collective actions involving numerous workers. Over the years, DOL and the courts have analyzed multiple factors in evaluating whether a worker is an employee or an independent contractor under the FLSA. Historically, the ultimate question has been whether, as a matter of “economic reality,” the worker is dependent on a particular company or individual for work (and is thus an employee) or is in business for himself or herself (and is thus an independent contractor).
DOL has expressed concern that the “economic reality test” and the factors considered in interpreting it have not always been sufficiently explained or consistently articulated, resulting in uncertainty among companies and workers. Consistent with interpretations to which courts and DOL have long adhered, the new rule continues the test but sharpens the inquiry into five distinct factors, discussed below.
New Rule and DOL Regulations
DOL’s rule for determining a worker’s status as an employee or independent contractor adds a new Part 795 to Title 29 of the Code of Federal Regulations (CFR). The “economic independence” of the worker is key, as the regulations state that “[a]n individual is an independent contractor . . . if the individual is, as a matter of economic reality, in business for him- or herself.” Importantly, the regulations then explain how economic dependence is to be determined.
Two “Core Factors”
The regulations identify two “core factors” which are most probative in the analysis and which will typically be given greater weight than any other factors. In fact, DOL notes that other factors may not be probative at all in some cases and thus are highly unlikely to outweigh the combined probative value of the two core factors.
The two core factors are:
- The nature and degree of the alleged employer’s control over the work
- The individual’s opportunity for profit or loss
The first core factor – control – weighs in favor of an individual being an independent contractor if the individual, as opposed to the potential employer, exercises substantial control over key aspects of the work. Examples include the individual’s initiative in “setting his or her own schedule, by selecting his or her projects, and/or through the ability to work for others, which might include the potential employer’s competitors.”
The regulations also identify three secondary factors which may be considered if and to the extent they are applicable and relevant to the particular relationship. The secondary factors are:
- The amount of skill required for the work. The regulations state that this factor weighs in favor of the individual being an independent contractor if the work requires specialized training or skill that the potential employer does not provide. On the other hand, this factor weighs in favor of the individual being an employee if the work requires no specialized training or skill.
- The degree of permanence of the working relationship between the individual and the potential employer. According to the regulations, this factor weighs in favor of the individual being an independent contractor to the extent the relationship is, by design, “definite in duration or sporadic.” The regulations state that, in contrast, this factor weighs in favor of the individual being an employee to the extent the work relationship is, by design, indefinite in duration or continuous.
- Whether the work is part of an integrated unit of production. The regulations state that this factor weighs in favor of the individual being an employee if the work is a component of the alleged employer’s “integrated production process for a good or service.” On the other hand, this factor weighs in favor of an individual being an independent contractor to the extent the work can be segregated from the potential employer’s production process.
The regulations make clear that the specific factors listed are not exhaustive and that no single factor is dispositive. Additional factors may be considered if those factors indicate whether the individual is in business for himself or herself, as opposed to being economically dependent on the potential employer for work.