U.S. Department of Labor Issues Rule to Simplify Independent Contractor Classification

Date: January 06, 2021

Small businesses get simplified rules on how to determine who qualifies as an employee or independent contractor

 

One question long presenting difficulty for small businesses is whether someone qualifies as an employee or an independent contractor under the Fair Labor Standards Act (FLSA). Today, the U.S. Department of Labor (DOL) clarified this distinction with the issuance of a final rule setting forth the appropriate standard to determine who qualifies as an employee or independent contractor.

Karen Harned, Executive Director of NFIB’s Small Business Legal Center, had this to say about the final rule: “NFIB has long advocated for a straightforward test for determining who is and is not an independent contractor and we are glad to see the Department of Labor issued a new rule today to help determine that. Small businesses succeed when they have simple rules from government agencies and can focus on operating their business. Today’s announcement is good news for small businesses to start the New Year.”

NFIB supported the DOL rulemaking. An explicit test to determine who is an independent contractor aids small businesses in determining who qualifies as an employee under the FLSA, while continuing to recognize and promote the entrepreneurial freedom of those wishing to work on their own.

The final rule includes the following clarifications:

  • Reaffirms an “economic reality” test to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).
  • Identifies and explains two “core factors” that are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself:
    • The nature and degree of control over the work.
    • The worker’s opportunity for profit or loss based on initiative and/or investment.
  • Identifies three other factors that may serve as additional guideposts in the analysis, particularly when the two core factors do not point to the same classification. The factors are:
    • The amount of skill required for the work.
    • The degree of permanence of the working relationship between the worker and the potential employer.
    • Whether the work is part of an integrated unit of production.
  • The actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
  • Provides six fact-specific examples applying the factors.

The final rule is set to take effect on March 8, 2021. NFIB issued a press release on the final rule. The DOL issued its own news release on the new rule, and the full final rule can be found here.

***The information provided here is not meant to be legal advice, but is guidance based on what we know at this time.

 Updated 1/6/2021

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