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