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DOL Announces Final Rule To Distinguish Between Employees and Independent Contractors

On January 6, the US Department of Labor announced a final rule, aimed at clarifying the distinction, under the FLSA, between employees and independent contractors.

A link to the final rule is here

Like the proposed rule that the Department issued in September 2020, the ultimate inquiry under the final rule is whether, as a matter of economic reality, the worker is dependent on a particular individual, business, or organization for work -- and is thus an employee or is in business for himself or herself the hallmark of an independent contractor.

Also, like the proposed rule, the final rule identifies five independent factors to guide the assessment. Two “core factors” carry the most weight.

Core Factor No. 1: The Nature and Degree of Control over the Work

This factor favors an independent contractor classification if the worker, rather than the potential employer, exercises substantial control over key aspects of work performance, such as by setting the work schedule, selecting projects, and performing services for others, which might include the potential employer’s competitors. The factor cuts the other way if the potential employer controls those matters.

Requiring a worker to comply with specific legal mandates, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships) does not constitute the type of control that makes the individual more or less likely to be an employee.

Core Factor No. 2: The Worker’s Opportunity for Profit or Loss

This factor favors an independent contractor classification if the worker can generate profit or loss by (1) exercising personal initiative, managerial skill, or business acumen; or (2) managing investments in, or capital expenditure on, helpers, equipment, materials, etc. The factor points the other way if the worker can’t affect his or her earnings through initiative or investment or can do so only by working more hours or more efficiently.

Other Factors

The Amount of Skill Required for the Work

The skill required factor points to independent contractor status if the individual’s work requires specialized training or skill that the potential employer does not provide. If not, the factor favors classification as an employee.

The Degree or Permanence of the Working Relationship between the Worker and the Potential Employer

This factor favors an independent contractor classification if the work relationship between the individual and the potential employer is designed to be definite in duration or sporadic; however, seasonal work by itself does not necessarily indicate independent contractor classification. If, in contrast, the work relationship is designed to be indefinite in duration or continuous, this factor points to employment.

Whether the Work is Part of an Integrated Unit of Production

If the individual’s work is a component of the potential employer’s integrated production process for a good or service, this factor weighs in favor of employee status. But, it weighs in favor of an independent contractor classification if the individual’s work is segregable from the potential employer’s production process.

Those factors are not exhaustive and no single factor is dispositive. Additional factors may be relevant if they indicate whether the worker is in business for himself or herself, as opposed to being economically dependent on the potential employer for work. Likewise, because they are the most probative, if the core factors both point towards the same classification, whether an employee or independent contractor, there is a substantial likelihood that that is the individual’s accurate classification.

Also, the final rule makes clear that, when conducting the economic realities analysis, the parties’ actual practice is more relevant than what may be contractually or theoretically possible. For example, an individual’s theoretical ability to negotiate prices or to work for a competing business is less meaningful if, as a practical matter, the individual is prevented from exercising that right. Likewise, a business’s contractual authority to supervise or discipline an individual may be of little relevance if, in practice, the business never exercises that authority.

The final rule goes into effect 60 days after its publication in the Federal Register, barring any decision by the Biden administration to change or withdraw it.

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