Final Rule: Independent Contract Status under the Fair labor Standards Act

By Richard Sox & Andrew Thomas

On January 6, 2021, the Department of Labor (“Department”) announced a final rule revising and clarifying the standard for employee versus independent contractor under the Fair Labor Standards Act (“FLSA”). The effective date of the final rule is March 8, 2021.

The FLSA and Economic Reality Test

The FLSA requires covered employers to pay their nonexempt employees at least the Federal minimum wage for every hour worked and overtime pay for every hour worked over 40 in a workweek, and also mandates that employers keep certain records regarding their employees. However, workers who perform services as independent contractors are not employees, thus the FLSA does not require independent contractors be paid either the minimum wage or overtime pay, nor does it require the same records to be kept. The Act defines “employer”, “employ” and “employee”, but not “independent contractor”. Courts and the Department have thus developed a multifactor test to analyze whether a worker is an employee or independent contractor under the FLSA, called the “economic realities test”. The ultimate inquiry is whether, as a matter of economic reality, the worker is dependent on a particular individual, business, or organization for work (and is thus an employee) or is in business for him/herself (and is this an independent contractor). However, this test and its component factors have not always been consistently explained or articulated by courts or the Department (and the test has generally been considered confusing and unpredictable), leading to its clarification by this final rule.

Summary of The Final Rule

The final rule adopts general interpretations to which courts and the Department have long adhered, reaffirming the “economic reality” test. The final rule maintains that independent contractors are workers who, as a matter of economic reality, are in business for themselves as opposed to being economically dependent on the potential employer for work. It also explains that the inquiry into economic dependence involves multiple factors, with no single factor being dispositive (in practice, different factors may be given different weights depending on the circumstances). The final rule tightens the inquiry into five distinct factors, as opposed to the five or more overlapping factors used by most courts and previously the Department. The final rule explains that two of the five factors are “core factors” – (1) the nature and degree of the worker’s control over the work and (2) the worker’s opportunity for profit or loss – and carry greater weight in the analysis of economic dependence, or lack thereof, than other factors. The rule notes that if both core factors point towards the same classification, there is a “substantial likelihood” that is the accurate classification. The remaining three factors are: (1) the amount of skill required for the work, (2) the degree of permanence of the working relationship, and (3) whether the work is part of an integrated unit of production. The final rule notes that these three factors may not always have probative value, and that under specific circumstances additional factors may also be relevant. The final rule ends by explaining that the actual practice of the parties involved is more relevant that contractual possibilities, stating a preference to factual occurrences over theoretical possibilities.

Summary:

• FLSA requires minimum wage be paid to all nonexempt employees
• Final rule clarified definition of independent contractor which does not have to be paid any particular wage
• Analysis of independent contractor status focuses on worker’s control over their work and worker’s opportunity for profit and loss from work