The Department of Labor (DOL) recently issued a long-awaited final rule clarifying the standard for determining employee versus independent contractor status under the Fair Labor Standards Act (FLSA). Because the FLSA only applies to employees and not independent contractors, the determination is extremely important for any organization utilizing independent contractors. The final rule is largely aimed at simplifying the determination; first by reaffirming the long-held “economic reality test” and second by emphasizing two “core principles” needed for the determination. The effective date of the final rule is March 8, 2021, but may be delayed until later by the DOL.
For years, federal courts have applied a so-called economic reality test, as well as other analysis, to determine if an individual performing work on behalf of a business, or other entity, is an employee. The test generally has focused on the extent of control the organization holds over the worker and whether he or she is dependent upon the business for the opportunity to render services or can do so independently.
The final rule further identifies two “core factors” that are most important to determining economic dependence: 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. The rule also provides three additional points of analysis for consideration. The DOL states these additional factors are “additional guideposts” in the determination that can be used when the first two “core factors” do not point in the same direction. These additional factors are: 1) the amount of skill required for the work; 2) the degree of permanence of the working relationship between the parties; and 3) whether the work is part of an integrated unit of production.
The rule also notes that the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible. This means that organizations need to carefully review both their contracts with any independent contractors as well as their actual working practices to ensure they have correctly categorized workers. Overall, the rule is likely to lead to more individuals being categorized as independent contractors, and will likely reduce litigation by making the determination easier.
The attorneys at Fishel Downey Albrecht & Riepenhoff, LLP routinely advise public and private employers on compliance with the FLSA and other state and federal employment regulations. If you have any questions about this or any other matter, please contact us at info@fisheldowney.com or call 614-221-1216.