DOL Announces Final Rule on Independent Contractor Classification
Contact Clara (C.B.) Burns, Charles C. High, Jr., Michael D. McQueen and Gilbert L. Sanchez -
January 7, 2021
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Yesterday, the Department of Labor unveiled its final rule clarifying the standard for employee versus independent contractor under the Fair Labor Standards Act (FLSA). The FLSA requires that covered employers pay their nonexempt employees at least the minimum wage for every hour worked and overtime pay for every hour worked over 40 in a workweek. An individual that performs services for an individual or entity as an independent contractor is not that person’s employee under the FLSA, however.
The DOL’s final rule reaffirms an “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). Under the final rule, there are two core factors which are most probative to the question of whether a worker is economically dependent on another individual’s business or is in business for him or herself. The two core factors include: (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 first factor favors the individual being an independent contractor to the extent that the individual, as opposed to the potential employer, exercises substantial control over key aspects of the performance of the work. The rule clarifies, however, that requiring an individual to comply with contractual terms typical of business relationships (such as having insurance, meeting deadlines or quality control standards, meeting health and safety standards) is not an indicator of employee status.
The second core factor combines the traditional opportunity for profit or loss factor with the worker’s investment factor. The DOL will analyze whether the worker has an opportunity for profit or loss based on either or both: (1) the exercise of personal initiative, including managerial skill or business insight; and/or (2) the management of investments in, or capital expenditure on, for example, helpers, equipment, or material. But an absence of capital investment does not prevent an individual from having an opportunity for profit or loss, because such opportunity can be based on the individual’s initiative. Further, the DOL abandons the notion that investments made by an independent contractor must be similar in amount to that made by the company engaging them. The “side-by-side comparison method,” the DOL states, “merely highlights the obvious and unhelpful fact that individual workers—whether employees or independent contractors—likely have fewer resources than businesses that, for example, maintain corporate offices.”
Moreover, there are also three guidepost noted in the final rule which are useful when the two core factors do not point to the same classification. These guidepost include the amount of skill required for the work, the degree of permanence of the working relationship between the worker and potential employer, and whether the work is part of an integrated unit of production. The actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
The final rule becomes effective on March 8, 2021. Employers should begin to assess whether re-classifying workers based on the DOL’s final rule may be warranted. However, employers should be mindful that with the Biden administration taking office this month, changes within the DOL are expected which may lead to revisions to this final rule. Nonetheless, Kemp Smith is here to answer any questions you may have regarding the classification of workers as independent contractors under the DOL’s final rule. Please feel free to contact Kemp Smith’s Labor and Employment Department at 915-533-4424.
The DOL’s final rule reaffirms an “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). Under the final rule, there are two core factors which are most probative to the question of whether a worker is economically dependent on another individual’s business or is in business for him or herself. The two core factors include: (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 first factor favors the individual being an independent contractor to the extent that the individual, as opposed to the potential employer, exercises substantial control over key aspects of the performance of the work. The rule clarifies, however, that requiring an individual to comply with contractual terms typical of business relationships (such as having insurance, meeting deadlines or quality control standards, meeting health and safety standards) is not an indicator of employee status.
The second core factor combines the traditional opportunity for profit or loss factor with the worker’s investment factor. The DOL will analyze whether the worker has an opportunity for profit or loss based on either or both: (1) the exercise of personal initiative, including managerial skill or business insight; and/or (2) the management of investments in, or capital expenditure on, for example, helpers, equipment, or material. But an absence of capital investment does not prevent an individual from having an opportunity for profit or loss, because such opportunity can be based on the individual’s initiative. Further, the DOL abandons the notion that investments made by an independent contractor must be similar in amount to that made by the company engaging them. The “side-by-side comparison method,” the DOL states, “merely highlights the obvious and unhelpful fact that individual workers—whether employees or independent contractors—likely have fewer resources than businesses that, for example, maintain corporate offices.”
Moreover, there are also three guidepost noted in the final rule which are useful when the two core factors do not point to the same classification. These guidepost include the amount of skill required for the work, the degree of permanence of the working relationship between the worker and potential employer, and whether the work is part of an integrated unit of production. The actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
The final rule becomes effective on March 8, 2021. Employers should begin to assess whether re-classifying workers based on the DOL’s final rule may be warranted. However, employers should be mindful that with the Biden administration taking office this month, changes within the DOL are expected which may lead to revisions to this final rule. Nonetheless, Kemp Smith is here to answer any questions you may have regarding the classification of workers as independent contractors under the DOL’s final rule. Please feel free to contact Kemp Smith’s Labor and Employment Department at 915-533-4424.
