DOL Issues Revised Interpretation on Independent Contractor Status
The Department of Labor (DOL) is revising its interpretation of independent contractor status under the Fair Labor Standards Act (FLSA). The effective date of the final rule was originally March 8, 2021, however, the effective date has been delayed until May 7, 2021.
Key takeaway for employers: Employers should be aware of the new rule and evaluate whether it will have an impact on an employer’s relationship with contractors, or those who service the employer formally outside of the employment relationship, in anticipation of the revised interpretation.
Background on the FLSA and Independent Contractors
The FLSA requires covered employers to pay nonexempt employees at least the Federal minimum wage for every hour worked and overtime for every hour over 40 in a workweek and requires employers to keep certain records regarding their employees. A worker who performs services for an entity as an independent contractor, however, is not that entity’s employee under the FLSA and as a result, the entity is not required to pay the independent contractor the minimum wage or overtime pay, and is not required to keep records regarding the independent contractor’s services.
THE FLSA does not define “independent contractor.” It does, however, define “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee,” 29 U.S.C. 203(d), “employee” as “any individual employed by an employer,” id. at 203(e) (subject to certain exceptions), and “employ” as “includ[ing] to suffer or permit to work,” id. at 203(g).
Revised Interpretation of Independent Contractors
Courts and the Department have traditionally interpreted the relationship under the “suffer or permit” standard which includes an evaluation of the extent of the worker’s economic dependence on the potential employer. The final rule, however, focuses on the economic reality.
The Executive Summary clarifies that the inquiry is whether, as a matter of economic reality, the worker is dependent on a particular individual, business, or organization for work (FLSA employee) or is in business for him- or herself (independent contractor). The regulatory guidance in the final rule is generally applicable across all industries and replaces the Department’s previous interpretations of independent contractor status under the FLSA which applied only in certain contexts.
The final rule explains that independent contractors are workers who, as a matter of economic reality, are in business for themselves as opposed to being economically dependent on the potential employer for work. The final rule also clarifies that the inquiry into economic dependence is based on several factors, with no one factor being dispositive, and that actual practices are entitled to greater weight.
In the final rule, the Department:
- Reaffirms an “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).
- Identifies and explains two “core factors” that are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself:
- The nature and degree of control over the work.
- The worker’s opportunity for profit or loss based on initiative and/or investment.
- Identifies three other factors that may serve as additional guideposts in the analysis, particularly when the two core factors do not point to the same classification. The factors are:
- The amount of skill required for the work.
- The degree of permanence of the working relationship between the worker and the potential employer.
- Whether the work is part of an integrated unit of production.
- The actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
- Provides six fact-specific examples applying the factors.