United States Department of Labor Retracts Clarification on Independent Contract Status Under the Fair Labor Standards Act
On January 6, 2021, the United State Department of Labor issued a clarification and “final rule,” which clarifies the difference between an independent contractor or an employee under the Fair Labor Standards Act (FLSA). This rule has taken effect as of March 8, 2021. This distinction is especially important due to the FLSA‘s minimum wage and overtime provisions not applying to independent contractors.
Over the years, and before the Final Rule, the factors used to determine the “economic reality” of whether an individual is an employee or independent contractor for an employer. This was derived from six factors, which are:
– The employer’s versus the individual’s degree of control over the work that is being done;
– The individual’s opportunity for profit or loss;
– The individual’s investment in facilities and equipment to perform the job;
– How permanent the relationship is between the employer and individual;
– The skill or expertise needed by the individual to perform the job;
– Whether the work is “part of an integrated unit of production.”
The “Final Rule” Clarification
Rather than treat all these factors with the same weight, the importance of the nature and degree of control over the work, and the individual’s opportunity for profit or loss were elevated in value. This means that when both of these factors support the existence of an independent contractor relationship, the individual will most likely be counted as an independent contractor, rather than an employee.
If these two factors are “inconclusive,” then the other factors listed above should be considered.
However, on May 5, 2021, the Department of Labor announced the withdrawing of the final rule (“Independent Contractor Rule”), which was effective immediately following publication in the Federal Register on May 6, 2021. The Department of Labor cited that the rule was not in accordance with the text or purpose of the FLSA, or current judicial precedent, and took issue with the rule prioritizing two factors over the longstanding balancing approach involving a review of circumstances related to the employment relationship.
For now, this withdrawal does not have any effect on the current operation of employers, as the rule never officially went into effect. As of now, the Department of Labor has not proposed a new rule to take its place.