On January 6, 2021, the Department of Labor (DOL) announced a final rule clarifying the standard for an employee as opposed to an independent contractor under the Fair Labor Standards Act (FLSA). The final rule goes into effect March 8, 2021.
The DOL reaffirmed the “economic reality” test to determine whether an individual is in business for him or herself (“independent contractor”) or is economically dependent on a potential employer for work (FLSA “employee”). There are two core factors that are most important to the “economic reality” test: (1) the nature and degree of control over the work and (2) the worker's opportunity for profit or loss based on initiative and/or investment.
Further, the DOL identified three additional factors to serve as guideposts in the “economic reality” analysis when the two core factors do not lead to the same classification. The three additional factors are as follows: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the worker and the potential employer; and (3) whether the individual is a component of a potential employer's integrated production process, whether for goods or services.
Lastly, the DOL stated that the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible. In that regard, the DOL would most likely consider the relationship between an individual and an employer, their practices, and how those aspects impact the individual's scope of work. This is a critical consideration for employers who utilize the services of individuals and attempt to skirt around the employment relationship – as defined by the FLSA – by entering into an “independent contractor” or 1099 contractual agreement.
If you have any questions about this final rule, please do not hesitate to reach out to White & Story.