DOL Finalizes Rule on Classifying Employees and Independent Contractors

January 7, 2021

WHAT: The U.S. Department of Labor (DOL) has finalized its rule on how to classify workers as either employees or independent contractors under the Fair Labor Standards Act (FLSA). The rule adopts the “economic reality” test for determining whether a particular worker is an employee or an independent contractor. According to the DOL, the rule is intended to “clarify and sharpen the contours of the economic reality test” in order to provide clarity and predictability for employers and employees.

WHEN: The rule will take effect on March 6, 2021.

WHAT TO KNOW: As Wiley has previously reported, whether or not a worker is an employee or an independent contractor has become a key issue over the last several years, with several states, notably California, passing their own rules on how to classify workers. This is the first time that the DOL has ruled on worker classifications, however, historically leaving the interpretation of the FLSA to the courts.

The test is substantially the same as what DOL proposed in the September Notice of Proposed Rulemaking; under the rule, the agency will consider the “economic reality” of the relationship by looking at whether a worker is in business for themselves, meaning they are an independent contractor, or if the worker is economically dependent on a putative employer for work, meaning they are an employee. To make this determination, DOL will rely on two core factors: the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss based on initiative or investment. Where these two factors align, no further analysis is needed, but otherwise DOL will also consider the amount of skill required for the work, the degree of permanence of the relationship, and whether the work is part of an integrated unit of production. 

Crucially, the final rule clarifies that “the offering of health, retirement, and other benefits is not necessarily indicative of employment status,” opening the door for employers to offer benefits to independent contractors without turning those contractors into employees, although employers are cautioned to not simply offer the same benefits as those offered to employees.

Whether or not this rule will actually go into effect remains to be seen, however. The rule itself is relatively employer-friendly because it makes it easier for employers to classify workers as independent contractors by emphasizing the worker’s control over the work, rather than the employers. This has caused substantial backlash from employee advocates and industry groups who argued against the proposed rule and who are likely to challenge the rule now that it has been finalized. These advocates may also wait until the change in administrations, as Biden has included strengthening employee rights as part of his Presidential plan. Because the rule does not go into effect for 60 days, there is a window of opportunity for the incoming Biden administration to withdraw it before it becomes effective. The Biden administration may also choose not to defend the rule against legal challenges or to re-write the rule entirely.

For now, however, employers should become familiar with the economic reality test as finalized by the DOL and carefully follow how the new administration elects to handle an issue that has become increasing under scrutiny by states seeking to expand the rights of independent contractors or rope more workers into the employee classification. While a decision to withdraw the rule may be seen as a welcome reprieve by some employers, the new administration will undoubted take a more aggressive position with respect to worker classifications than the prior administration, one that is likely to be more employee friendly. Employers should use this time before the rule goes into effect (or is withdrawn) to review existing policies and ensure that any “housekeeping” with respect to worker-relationships is taken care of now, before this rule, or any other, goes into effect.

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