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Final Ruling: Independent Contractors Under The Fair Labor Standards Act

Update Issued 1.22.2021: As of this morning, the Biden Administration is reviewing all proposed and pending regulations. Check back for updates as the situation evolves.

Determining whether a worker is an independent contractor or employee has long been a complicated issue for employers.

By definition, an independent contractor is someone who freelances or provides service to another entity. Typically, independent contractors control their own work, make their own decisions about what engagements to take on, and are subject to Self-Employment Tax. With the re-emergence of the gig economy in 2009 during the financial crisis, the prevalence of independent contractors increased substantially, putting more pressure on employers to ensure appropriate classification for compliance with wage and hour law.

On January 6, 2021 the Department of Labor (“DOL”) announced an updated ruling to clarify the difference between an independent contractor and an employee.

The updated ruling, which will go into effect on March 8, 2021, outlines the following standards that employers should use in determining the final classification under the Fair Labor Standards Act (“FLSA”):

  • Re-enforces the use of the Economic Realities Test. This test looks at the level of dependence the worker has on the entity he/she is working for in determining classification. If the worker earns his/her primary earnings from the entity, the worker is likely an employee under the FLSA.
  • Identifies two additional core factors to determine a worker’s dependency on the entity for economic gain:
      1. The degree of control the worker has over the work being performed
      2. The worker’s opportunity for profit or loss from the work engagement
  • Identifies three additional factors for consideration should the two core factors not yield the same classification:
      1. Skill required for the work being performed
      2. Permanence of the working relationship
      3. Whether the work is part of an integrated unit of production

To ensure proper interpretation of the new ruling, the DOL has also included six examples of classification incorporating all the aforementioned factors. The proposed ruling is open to a comment period for 30 days and all comments will become a matter of public record.

By clarifying the definition of an independent contractor, the DOL hopes to reduce future work misclassifications, as well as related litigation. It is not expected that this ruling will result in more employee classifications and still allows workers the flexibility and opportunities associated with independent contract work.

To learn more about how this ruling may impact your workforce, connect with your local OneDigital team.