WASHINGTON — On Jan. 7, the U.S. Department of Labor (DOL) published a final rule in the Federal Register that clarifies the standard for employee versus independent contractor status under the Fair Labor Standards Act (FLSA).
The rule, which will take effect March 8, defines “independent contractors” as people who are in fact in business for themselves and are not economically dependent on a single potential employer for work.
“This rule brings long-needed clarity for American workers and employers,” said U.S. Secretary of Labor Eugene Scalia. “Sharpening the test to determine who is an independent contractor under the Fair Labor Standards Act makes it easier to identify employees covered by the act, while recognizing and respecting the entrepreneurial spirit of workers who choose to pursue the freedom associated with being an independent contractor.”
The final rule, which can be viewed here, 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, notably 1) the nature and degree of control over the work, and 2) 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 1) the amount of skill required for the work, 2) the degree of permanence of the working relationship between the worker and the potential employer and 3) 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.
“Streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility,” said Cheryl Stanton, administrator of the DOL’s wage and hour division. “The rule we announced today continues our work to simplify the compliance landscape for businesses and to improve conditions for workers. The real-life examples included in the rule provide even greater clarity for the workforce.”