New Standard for Independent Contractor Under the FLSA
By Kevin M. Mosher • Jan 7, 2021
On January 7, 2020, the Department of Labor (DOL) published a final rule clarifying the standard for determining who is an employee and who is an independent contract under the Fair Labor Standards Act (FLSA). As you know, the FLSA determines which workers are entitled to minimum wages and overtime, so this issue is an important one for employers. The way “employer” and “employee” is currently defined has led to confusion over the years, leading different courts to reach different conclusions. Now, the DOL has clearly stated that employers and courts should use the “economic realities” test when determining whether an individual is an employee or independent contractor.
What is the economic realities test?
Basically, it all comes down to whether “the individual is, as a matter of economic reality, in business for him or herself.”
How do we figure that out?
There are five factors to consider when making this determination. While no single factor is determinative, there are two core factors that should be given the most weight:
The nature and degree of the worker’s control over the work; and
The worker’s opportunity for profit or loss.
Typically, the answers to these two inquiries will determine whether an individual is an employee or an independent contractor. However, if the individual’s status is still unclear, the following factors should be considered:
The amount of skill required;
The degree of permanence between the individual and the employer; and
Whether the individuals’ work is part of an integrated unit of production.
The relevant parties’ actual practices and working relationship is what is most relevant in these inquiries—not the theoretical relationship that a contract describes.
Interesting new DOL perspective on benefits
One question that often vexes employers is whether the providing of benefits to the independent contractor will factor into whether the contractor is an employee. The DOL offered some clarity in the final regulations saying that – “the offering of health, retirement, and other benefits is not necessarily indicative of employment status.” In other words, and forgive the legal jargon, but the receipt of benefits by an independent contractor is not dispositive on the issue of whether the person is an independent contractor under the economic realities test.
This is not to say that all benefits are made the same. If the benefits offered to the independent contractor are negotiated and different from those offered to employees it would be less indicative of an employee relationship versus including the contractor in employee group benefits. Think contributing to the contractor’s personal individual retirement account versus including them in your company’s 401k plan. Employers should proceed cautiously when compensating anything in the way of benefits to contractors, but this statement from the DOL does create optimism.
When does this rule take effect?
This rule will go into effect March 8, 2021. However, like every other administrative agency, the DOL will likely by impacted by the change in presidential administrations. There is speculation that the Biden administration will delay this regulations effective date. Stay tuned!
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