DOL finalizes rule adopting new test to assess independent contractor status

The U.S. Department of Labor (DOL) has finalized a rule addressing how to determine whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA), effective March 8, 2021. Under the FLSA, independent contractors are not eligible for minimum wage or overtime compensation.

The new rule codifies the “economic reality” test, a multi-factor test that has been adopted in varied forms by many courts and used previously by the DOL to assess whether a worker is an employee or independent contractor. The ultimate inquiry under the economic reality test is whether the worker is dependent on the employer (an employee) or is in business for him or herself (an independent contractor).

The final rule, which is generally the same as DOL’s proposed version announced in September, “sharpens” the economic reality test by adopting the following five factors to examine:

1. The nature and degree of the worker’s control over the work (e.g., the worker’s ability to set a schedule, select projects and work for others).
2. The worker’s opportunity for profit or loss (e.g., through the exercise of personal initiative, skill or business acumen, and through investments or capital expenditures).
3. The amount of skill required for the work (e.g., whether the work requires a specialized skill or the worker depends on the employer for training).
4. The degree of permanence of the working relationship between the worker and the potential employer (e.g., whether the work is definite or indefinite in duration).
5. Whether the work is part of an integrated unit of production (or is segregable from the potential employer’s production process).

While no one factor is dispositive on its own, the rule states that the first two factors are “core factors” that are most probative as to whether or not a worker is an economically dependent employee. Further, if both core factors point toward the same classification, whether employee or independent contractor, there is a “substantial likelihood” that the classification is accurate.

After receiving public comments requesting more clarity on the rule’s application, the DOL also added examples to the final rule in which the economic realities test is applied to specific industries or occupations, such truck driving, residential construction, freelance journalism, housekeeping and household repair.

Notably, the rule will take effect after President-elect Joe Biden assumes office, leaving open the possibility for the incoming administration’s withdrawal of the rule. Regardless, employers should note they must still comply with state and local laws regarding independent contractor classifications in the jurisdictions in which they have workers.