06 January 2021

U.S. Department of Labor Announces Final Rule on Independent Contractors

On January 6, 2020, the U.S. Department of Labor (“DOL”) issued a new rule updating its test for determining whether a worker is an “independent contractor” or an “employee” for purposes of the Fair Labor Standards Act (FLSA).  The DOL’s stated purpose is to provide clarity on whether a worker depends upon someone else for business opportunities (likely an employee) or is in business for herself or himself (likely an independent contractor).

The final rule embodies the DOL’s current interpretation of the so-called the “economic reality” test.  The rule identifies several factors that will be considered in determining whether a worker is an employer or an independent contractor.  But the rule emphasizes two “core factors” that “are the most probative” of employee status, each of which “typically carries greater weight in the analysis than any other factor:

  1. The nature and degree of the worker’s control over the work; and
  2. The worker’s opportunity for profit or loss based on initiative or investment.

While no factor is dispositive, these “core” factors are afforded weight greater than other factors. These two factors are so significant that the DOL said it is “highly unlikely” for other factors to outweigh the two core factors. Having said that, an employer will still need to consider the other three factors. According to the DOL, these three factors will serve as “guideposts” in the independent contractor analysis, particularly when the two core factors point to conflicting classifications. The three factors include:

  1.  The skills required for the work;
  2. The permanency of the working relationship between the worker and the potential employer; and
  3. Whether the work is part of an integrated unit of production.

When reviewing all of these factors, an employer should examine the actual practices of the worker, rather than what may be contractually or theoretically possible.The new rule will take effect on March 8, 2021. If you have questions about this new regulation or guidance on determining whether a worker is an independent contractor, please contact the authors or any Miller Johnson attorney.