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DOL Issues New Rule for Determining Independent Contractor Status
*On May 5, 2021 the Department of Labor issued a new Final Rule that withdrew this Rule. The Rule was never made effective before it was withdrawn. This withdrawal was expected with the change in administration. Employers should continue to rely on the previous “totality of the circumstances” economic realities test that has been used by the DOL in the past when determining independent contractor status. We will provide updates as the Biden administration develops its own regulations to address this and other issues
Whether a particular individual is classified as an employee or an independent contractor under the federal Fair Labor Standards Act (FLSA) is critical for determining an organization’s obligations concerning minimum wage, overtime pay, record keeping, and other requirements under the law. On January 6, 2021, the Department of Labor (DOL), which is responsible for enforcing the FLSA, issued a new rule seeking to clarify the standard for classifying an individual as an independent contractor under the FLSA. The new rule is slated to take effect on March 8, 2021, although changes to the rule’s content and/or implementation by the new Biden Administration are possible.
The DOL’s new rule affirms the economic realities test that has been developed in the courts and outlines specific factors that should be considered in applying that test. The economic realities test asks whether the individual is economically dependent on an employer for work or is fundamentally in business for themselves. This is a more straightforward standard compared to prior tests, and it is designed to provide clarity to both employers and workers, and allow employers greater flexibility in developing their workforce.
The rule identifies two core factors of the economic realities test, which include:
- The nature and degree of the worker’s control over the work. For example, schedule, projects, and exclusivity.
- The worker’s opportunity for profit or loss based on initiative and/or investment.
The rule also identifies three other factors that may serve as additional guideposts in the analysis:
- The amount of skill required for the work. Specifically, if the individual brings skills that the proposed employer could not have taught them.
- The degree of permanence of the working relationship between the individual and the potential employer. Indefinite employment weighs in favor of being an employee.
- Whether the work is part of an integrated unit of production.
The five listed factors are not exhaustive according to the regulation, nor is any one factor dispositive. However, factors (1) and (2) above are the most probative, and therefore to be given the most weight. Factors (3), (4), and (5) may not be relevant to the analysis at all in some circumstances. Additional factors may be considered so long as they address the central question of economic dependence. All of the factors should be considered in terms of the parties’ actual practice, rather than considering what the relationship could be in theory.
The rule also provides six specific examples that are intended to further clarify the application of the economic realities test.
Example 1: An over-the-road truck driver works for a logistics company. The truck driver owns and operates his own vehicle and substantially controls his schedule, but the company has installed a speed-monitoring device on the vehicle to ensure compliance with relevant laws. The company also mandates the contractual delivery deadline and offers incentives for meeting those deadlines. Under these facts, the rules conclude that the truck driver is an independent contractor.
Example 2: An individual takes assignments from an app-based service for home repair work. The company developed the app, but the individual can increase his earnings by taking initiative and investing in equipment. Despite the investment by the company, the rules define this as an independent contractor relationship.
Example 3: An individual works for a residential construction company performing renovation and repair services. The company determines her tasks and she is paid a fixed hourly wage. She has a side business, owning a food truck as well, which makes substantial profits. The rules affirm she is an employee of the construction company and the side business in a different industry has no impact on that designation.
Example 4: An individual works seasonally as a housekeeper for a ski resort during the winter months. He returns every winter without formally reapplying. Due to the long-term indefinite nature of the employment, the rules classify this individual as an employee.
Example 5: An employee works part-time from home as a newspaper editor making layout decisions, editing the articles and sometimes rewriting articles. Her job is substantially the same as a number of full time editors who she works with and who are employees of the newspaper. Because she is part of an integrated unit of production, the rules conclude she is an employee.
Example 6: A journalist writes for a newspaper on a freelance basis. The individual generally works from home and submits an article every 2 or 3. He sometimes communicates regarding subject matter or revisions, but does not otherwise work with the newspaper’s employees. Because he is not part of the integrated unit of production, he is an independent contractor.
By incorporating the above examples into its formal rule, the DOL hopes to clarify the economic realities test criteria and reduce worker misclassification. While these examples are useful, each classification must be determined on a case-by-case basis considering the unique circumstances of a particular position, as failure to properly classify an individual as an employee or independent contractors can have significant consequences. For this reason, we recommend periodically reviewing the positions within your workforce, especially when creating new positons or restructuring, to ensure compliance with the law.
If you have questions about the DOL’s new rule, or would like assistance reviewing the classifications of positons within your workforce, please contact Lauren Burand at 262-364-0258 or firstname.lastname@example.org or Brian Waterman at 262-364-0257 or email@example.com or your Buelow Vetter attorney.