U.S. Department of Labor Issues Final Rule on Independent Contractor Status

On September 22, 2020, the United States Department of Labor (DOL) issued a proposed rule, offering guidance on independent contractor status under the Fair Labor Standards Act (FLSA). The proposed rule was published in the Federal Register on September 25, which began a 30-day comment period during which the public could provide comments or ask questions about the proposed rule.

On January 6, 2021, the DOL announced the final rule on this issue. The final rule, 29 C.F.R. §§ 780, 788, 795, adopts an “economic reality” test to determine whether an individual is in business for him or herself, and thus an independent contractor, or is economically dependent on an employer for work, and thus an employee under the FLSA. This rule offers a more employer-friendly approach to the independent contractor determination under the FLSA. The rule will have implications under the FLSA which includes rules requiring minimum wage and overtime pay for covered employees and excludes independent contractors from certain recordkeeping requirements.

The economic realities test focuses on two factors that are probative of independent contractor status:

1. The nature and degree of the individual’s control over the work – If an individual exercise substantial control over key aspects of the work performance, such as their schedule, selection of projects, and ability to work for others, that individual would likely be considered an independent contractor. If, however, the individual did not exercise such control, they would likely be considered an employee under the FLSA.

2. The individual’s opportunity for profit or loss – If an individual had the opportunity to earn profits and incur losses based on the exercise of his or her own initiative or management of his or her own investment on helpers or equipment to further their work, that individual would likely be considered an independent contractor. If, however, an individual did not possess these opportunities, they would likely be considered an employee under the FLSA.

The DOL deems these factors highly probative of whether an individual is “an entrepreneurial independent contractor,” or a “wage earner employee.” Independent Contractor Status Under the Fair Labor Standards Act, 85 Fed. Reg. 60600, 60600 (proposed Sept. 25, 2020) (to be codified at 29 C.F.R. §§ 780, 788, 795.

The new rule also identifies three factors that may serve as additional guideposts under the economic realities test including: (1) the amount of skill required for the work; (2) the degree of performance of the working relationship between the worker and the potential employer; and (3) whether the work is part of an integrated unit of production. The actual practice of the worker and the employer is more relevant to these factors then what may be contractually or theoretically possible.

The final rule is set to be published in the Federal Register on January 7, 2021.

This new rule comes just days before President-Elect Joseph Biden is set to take office, which raises questions about what action the President-Elect may take regarding the rule. The President Elect supports the Protecting the Right to Organize (PRO) Act which adopts the “ABC” Test, the more employee-friendly rule for classifying independent contractors that has already been adopted by states such as California.

The newly published rule can be found here.