On Jan. 6, the U.S. Department of Labor finalized a rule to clarify the classification distinction for employees versus independent contractors under the Fair Labor Standards Act. The final rule was implemented in an effort to provide employers with more certainty in making decisions about how to classify workers.
The final rule notes that “[t]he ultimate inquiry is whether, as a matter of economic reality, the worker is dependent upon a particular individual, business, or organization for work (and is thus an employee) or is in business for him- or herself (and is thus an independent contractor).” Accordingly, the DOL reaffirmed the economic reality test – a multi-factor test to determine worker classifications that the DOL and many courts have used and long struggled to apply in a consistent and predicable manner. To curb some of those inconsistencies, the final rule provides some guidance on the application of the factors.
The final rule identifies five specific factors to consider when classifying workers. There are two “core factors,” which include (1) the nature and degree of control over the individual’s work, and (2) the individual’s opportunity for profit or loss based on his or her own initiative or management of investment. These core factors are the “most probative” to the analysis, but there are also “other factors” to consider, including (a) the amount of skill required for the work, (b) the degree of permanence of the working relationship between the individual and the potential employer, and (c) whether the work is part of an integrated unit of production. Employers should note that the actual practices of the worker and the employer are more relevant than contractual obligations.
While the final rule’s guidance seems to provide some relief to employers, that relief may be short-lived because the Biden administration has already expressed intent to freeze Trump administration regulations that are not yet effective when President-elect Biden takes office. This particular rule will not become effective until March 8, and only if the Biden administration does not delay, modify or rescind the rule. Employers should, therefore, wait and see how the Biden administration reacts to the final rule before making any changes to business arrangements.
Worker classifications are inherently complex and fact-specific, so employers with questions about the proper classification of their workers should contact an experienced labor and employment attorney.
* This article first appeared in The Journal Record on January 20, 2021, and is reproduced with permission from the publisher.