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On January 6, 2021, the US Department of Labor (“DOL”) announced its final rule clarifying the standard for employee versus independent contractor under the Fair Labor Standards Act (“FLSA”). The effective date of the final rule is March 8, 2021.The purpose of the new rule is to provide clarity to workers and employers by making it easier to identify employees covered by the FLSA. The new rule replaces the previously used seven-factor economic realities test that the DOL and most Courts have used when analyzing a work relationship to determine independent contractor versus employee status.
The new DOL rule
begins by reaffirming the “economic reality” test to determine
whether an individual is economically dependent on a potential employer for
work or is in business for him or herself, and is therefore an independent
contractor. The rule identifies five factors that are important to
consider, but its first two factors are identified as the “core factors”
that are most important to the analysis. The five 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;
(3) the amount of skill required for the work;
(4) the degree of permanence of the working relationship between the worker and the potential employer; and
(5) whether the work is part of an integrated unit of production.
The DOL regulations specifically
provide that in the event that the first two factors align and suggest the same
classification, then there is a "substantial likelihood" that the
classification is correct notwithstanding the remaining factors. The more
control an employer has over key aspects of the performance of the work, the
more likely it is that the worker is an employee rather than an economic
contractor.
The new DOL rule rescinds any prior DOL guidance or ruling that is inconsistent with the rule and states that businesses who rely on the rule are entitled to the good faith defense. Employers should familiarize themselves with the new rule as the distinction is critical under the FLSA because employers must comply with its minimum wage and overtime requirements for employees, but not independent contractors. Employers should also pay attention to state laws where they operate, which may impose stricter standards than the new DOL rule