Department of Labor Announces Final Rule on Independent Contractor Status Under the Fair Labor Standards Act

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On January 6, 2021, the U.S. Department of Labor (“DOL”) announced its Final Rule to provide guidance on determining whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (“FLSA”).  The Final Rule largely adopts the DOL’s proposed rule, which was released on September 22, 2020.  Incoming President Biden has previously indicated that he will issue an executive order to halt or delay regulations such as this that were issued between the election and his inauguration; however, if he does not do so, the Final Rule will go into effect on March 8, 2021.

According to the DOL, the Final Rule reaffirms the previously proposed “economic reality” test to determine “whether an individual is in business for himself or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).”  There are two core factors that weigh into this determination:

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

There are also three other factors that may serve as additional guidance in the analysis.  These factors are particularly relevant when the two core factors above do not point to the same worker classification.  These three additional factors are:

  • The amount of skill required for the work;
  • The degree of permanence of the working relationship between the worker and the potential employer; and
  • Whether the work is part of an integrated unit of production.

The DOL specified that the “actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible” when determining whether a worker is an employee or an independent contractor.  The Final Rule also provides six fact-specific examples of how the Rule should be applied in certain circumstances.

Given the uncertainty with this Final Rule under the Biden administration, and that the status of employees/independent contractors will likely receive enhanced attention under the new administration, it is important that employers understand the factual underpinnings supporting their worker classifications so that they are prepared for potentially enhanced scrutiny of those classification decisions, under any test. For questions about determining whether a worker is an employee or independent contractor under the Final Rule, you can contact Cayman Caven or the Burr & Forman attorney with whom you regularly work.

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