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January 7, 2021
Update: In early May, the DOL withdrew the Trump administration rule that proposed a new multi-factor test for determining independent contractor status. See 86 Fed Reg. 24303.
Yesterday, the United States Department of Labor (DOL) announced its final rule clarifying the standard for determining who is an employee versus an independent contractor under the Fair Labor Standards Act (FLSA). The employee versus independent contractor distinction is important because the FLSA requires covered employers to pay their nonexempt employees at least the Federal minimum wage for each hour worked and overtime pay for each hour worked over 40 hours in a workweek. The FLSA also requires employers to keep certain records regarding employees. The FLSA does not extend such requirements to workers classified as independent contractors. The DOL’s rule seeks to simplify and balance the principles that courts long have used to determine the employee versus independent contractor question, while respecting people’s desire to be their own bosses.
The rule reaffirms the “economic reality” test, where the ultimate inquiry is whether the worker is dependent on a particular individual, business, or organization (hereinafter “entity”) for work (an employee) or is in business for him- or herself (an independent contractor). The rule identifies the two core factors that are most probative to the “economic reality” test: (1) the nature and degree of the entity’s control over the work (more entity control over the work indicates that the worker is an employee); and (2) the worker’s opportunity for profit or loss based on initiative or investment (the more initiative or investment by the worker, the more likely s/he is an independent contractor).
The rule then identifies three other factors that may aid in the analysis, particularly when the two core factors arguably point to different results: (3) the amount of skill required for the work (weighs in favor of the worker being an independent contractor to the extent the work requires specialized training or skill that the entity does not provide); (4) the degree of permanence of the working relationship between the worker and the entity (weighs in favor of the worker being an independent contractor to the extent the work relationship is by design definite in duration or sporadic); and (5) whether the work is part of an integrated unit of production (the more that a worker is integrated into the assembly line alongside the entity’s employees, the more likely s/he is an employee).
So what’s the risk?
If you misclassify a worker as an independent contractor, you could be liable to that worker (and others like that worker) for back wages, including overtime, as well as liquidated damages and attorney’s fees. You also could face state-imposed fines, tax penalties, damage to your reputation, and sometimes even criminal penalties, among other things.
You can read the DOL’s entire rule here, which becomes effective on March 8, 2021. Now is the time to conduct an HR audit to make sure that your workers are properly classified. We can help.