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DOL Clarifies the Classification of Independent Contractors Under the Fair Labor Standards Act

January 8, 2021
Labor and Employment Advisory

On January 7, 2021, the Department of Labor (DOL) published a final rule to clarify the standard for independent contractors under the Fair Labor Standards Act (FLSA). The rule will take effect on March 8, 2021 and will make it easier for employers to classify workers as independent contractors. This rule will also allow employers to provide certain benefits to independent contractors, provided that the independent contractor benefits differ from those of the employees.

As written, the FLSA does not define the term "independent contractor." Because of this omission, courts look to the economic dependence of independent contractors by using a multi-factor test. The biggest factor in this multi-factor test is known as the "economic realities test," which considers five factors to determine the economic reality of whether the worker is dependent on a potential employer, and thus an employee, or whether the employee is in business for herself, and thus an independent contractor.

Under the new rule, the DOL affirmed the economic realities test to classify independent contractors. The rule categorizes two of the five factors as "core factors" that carry greater weight in the analysis – (i) the nature and degree of the worker's control over the work and (ii) the worker's opportunity for profit or loss.  The other three factors of the test serve as guideposts in the analysis. Of significance, the DOL has expressly declined to adopt either the common law control test commonly used in some states or the strict ABC test used in California.

1. Core Factor One: Nature and Degree of the Worker's Control Over the Work

The DOL specified certain considerations in favor of classifying an individual as an independent contractor. These factors include whether the worker sets his or her own schedule, chooses assignments, works without supervision, and/or is able to work for others.

On the other hand, the rule establishes that requiring the worker to comply with legal obligations, health and safety standards, carry insurance, and meet deadlines or quality controls standards would facilitate the classification as an employee.

2. Core Factor Two: Worker's Opportunity for Profit or Loss

The DOL also clarified that the second control factor will turn on the worker's exercise of initiative regarding management and expenditures. However, the worker does not need the ability to control his or her opportunity for profit or loss to be classified as an independent contractor.

3. Remaining "Guidepost" Factors

The remaining three factors in the economic realities test to be considered are:

  • (iii) the amount of skill required for the work,
  • (iv) the degree of permanence of the working relationship between the worker and the potential employer, and
  • (v) whether the work is part of an integrated unit of production.

The DOL also added that other factors, in addition to the five economic realities factors, may also be relevant in classifying a worker to the extent that the factor indicates whether the individual is in business for herself or whether the individual is economically dependent upon the employer. The DOL notes that these additional factors will vary case-to-case and are unlikely to outweigh either of the two core factors.

In sum, the DOL's final rule clarifies that employers should consider the actual practices of the individual, rather than what is contractually required of the individual, when determining whether a worker is classified as an independent contractor or an employee.

Moreover, the rule opens the door to allowing employers to provide benefits for independent contractors without impacting the employment status of those individuals. Employers that decide to provide benefits to independent contractors should ensure that all aspects of the contractor relationship remain intact and that there is some recognizable difference between the two benefit plans.

It is currently unclear whether or how the Biden administration will revise or repeal the new rule. Varnum will monitor this and provide an update should anything change.

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