Update: Effective May 6, 2021, this Final Rule has been formally withdrawn. According to the Department of Labor, this Final Rule had never been used by any court or the Wage and Hour division, and is not supported by the Fair Labor Standards Act’s text, purpose, or judicial precedent.
On January 6, 2021, the United States Department of Labor (“DOL”) announced a final rule that addresses the distinction between employees and independent contractors under the Fair Labor Standards Act (“FLSA”). The final rule will be published in the Federal Register on January 7, 2021 but will not take effect until 60 days thereafter (March 8, 2021).
According to the DOL, the new rule addresses and clarifies the following issues:
- Reaffirms an “economic reality” test to decide whether an individual is engaged in business for him or herself (i.e., an independent contractor) or economically depends on a potential employer for work (i.e., an employee);
- Addresses and emphasizes two “core factors” that are most probative to this distinction between independent contractors and employees:
- The nature and degree of control over the work at issue; and
- The individual’s opportunity for profit or loss based on initiative and/or investment;
- Addresses and explains three other factors that may be considered as part of the analysis, especially where the two “core factors” do not point to the same classification:
- The amount of skill required for the work;
- The degree of permanence of the working relationship between the worker and the potential employer; and
- Whether the work is part of an integrated unit of production.
- The actual practices of the individual and putative employer are more relevant than contractual or theoretical possibilities;
- Six fact-specific examples with analysis and application of the factors.
Per a DOL news release, current United States Secretary of Labor—Eugene Scalia—states the new rule brings “long-needed clarity” to the employee-independent contractor distinction “while recognizing and respecting the entrepreneurial sprit of workers who choose to pursue the freedom associated with being an independent contractor.” The current Wage and Hour Division Administrator—Cheryl Stanton—echoed similar sentiments, additionally noting that the new final rule is anticipated to “reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility.”
Time will tell whether the new final rule will have the intended or anticipated effects stated by the current DOL administration. Many consider the new rule to be more employer-friendly, but whether that is true remains to be seen. Ultimately, the only clear takeaway at this point is that this new final rule provides guidance from the DOL on a significant issue that courts across the country have varied in analyzing and deciding. Stay tuned for further developments.