New Department of Labor Guidance on Whether Workers are Employees or Independent Contractors

On Wednesday, January 6, 2021, the U.S. Department of Labor (“DOL”) provided a “final rule” to clarify the distinction between employee status and independent contractor status under the Fair Labor Standards Act (FLSA). Employers frequently face claims brought by workers challenging whether the workers are actually employees and have been inappropriately classified as independent contractors. The DOL’s Wage and Hour Division hopes that the new guidance will help “reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility.”

What Employers Need to Know

What is the “final rule” test?

In its final rule, the DOL reaffirmed the “Economic Reality” Test, which focuses on the difference between individuals who work for themselves – an independent contractor – rather than for an employer – an employee. The DOL outlined five factors for making this determination, including two “core factors,” along with three additional factors. The two core factors are:

  1. The nature and degree of control over the work.
  2. The worker’s opportunity for profit or loss based on initiative and/or investment.

If the first two factors do not point to the same classification, the remaining three factors that should be considered are:

  1. The amount of skill required for the work.
  2. The degree of permanence of the working relationship between the worker and potential employee.
  3. Whether the work is part of an integrated unit of production.

Why is the new rule important?

The past uncertainty of this rule has created inconsistent outcomes from both Courts and DOL decisions. The DOL’s willingness to provide a more straightforward test should result in more predictability on future outcomes when a case hinges on the issue of whether a worker is an employee versus independent contractor. This issue often arises in the context of minimum wage or overtime, as independent contractors are not subject to these requirements under the FLSA.

Additionally, the DOL has also included six fact examples within the final rule where the factors are applied. For help determining whether your workers are properly classified as employees or independent contractors, please contact the labor and employment lawyers at Titus Hillis Reynolds Love.

When does the new rule go into effect?

March 8, 2021.

Contact the Labor & Employment Practice Group of Titus Hillis Reynolds Love if you have any questions.

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