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DOL's Final Rule on Independent Contractor Status Under the FLSA

Updated: May 7, 2021

The Department of Labor published its final rule on independent contractor status under the Fair Labor Standards Act in the Federal Register on January 7, 2021. The rule was originally to become effective on March 8, 2021, but the effective date was subsequently delayed until May 7, 2021.


The final rule reaffirms the "economic reality" test for determining whether an individual is an employee or independent contractor under the FLSA. The test seeks 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).


The test utilizes two "core" factors: 1) the nature and degree of control over the work; and 2) the worker's opportunity for profit or loss based on initiative and/or investment.


Under the first prong, an individual will likely be deemed an independent contractor if he or she exercises substantial control over key aspects of the performance of the work, such as setting a schedule, selecting projects, and/or the ability to work for others. On the other hand, an individual will likely be deemed an employee if the potential employer exercises substantial control over key aspects of the work, such as by controlling the individual's schedule or workload and/or by directly or indirectly requiring the individual to work exclusively for the potential employer. However, requiring an individual to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses does not constitute control for the purposes of employee classification.


Under the second prong, an individual will likely be deemed an independent contractor if he or she has the opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen or judgment) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work. Conversely, an individual will likely be deemed an employee if he or she is unable to affect his or her earnings or is only able to do so by working more hours or more efficiently.


If both core factors point towards the same classification, there is a substantial likelihood that that classification is appropriate.


The rule also identifies three other factors that may serve as additional guideposts, particularly when the two core factors do not point to the same classification: 1) the amount of skill required for the work (the more specialized training or skill involved, the more likely the individual is an independent contractor); 2) the degree of permanence of the working relationship between the worker and the potential employer (the more permanent or continuous the relationship, the more likely the individual is an employee); and 3) whether the work is part of an integrated unit of production (the more segregable the work, the more likely the individual is an independent contractor).


Lastly, the rule makes clear that the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.


A copy of the full rule is available here.


*** UPDATE ***

On March 11, 2021, the DOL announced a proposal to withdraw this final rule. Currently, the DOL is not proposing an alternative.


***UPDATE***

On May 5, 2021, the DOL announced that it is withdrawing the rule. The DOL has not indicated whether it will offer a new rule on the topic.


Employers are advised to consult with their legal counsel regarding specific questions or concerns. If you have any questions, or need assistance, please feel free to contact Jeremy D. Iosue or Jason T. Hartzell at (216) 651-0451.


This Employment Law Alert may provide an overview of specific federal and/or state laws and regulations. It is not intended to be, and should not be construed as, legal advice for any particular situation or individual.


Copyright © 2021 Stefanik Iosue & Associates, LLC. All rights reserved.

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