On January 6th, 2021, the U.S. Department of Labor (DOL) released a new final rule. Namely, the rule clarifies the standard for employee versus independent contractor status under the Fair Labor Standards Act (FLSA).

Background of the FLSA

Signed into United States law in 1938, the FLSA created the right for employees to earn a minimum wage. Additionally, the FLSA requires employees to earn time-and-a-half overtime pay when working over 40 hours a week. The law also prohibits the employment of minors in “oppressive child labor” situations. According to the law, the FLSA applies to employees who are:

  • engaged in interstate commerce;
  • involved in the production of goods for commerce; or
  • employed by an enterprise engaged in commerce or in the production of goods for commerce.

Since its inception in 1938, the FLSA has seen multiple additions and updates. For example, in February 2020, the DOL issued a final rule on joint employer status. That rule went into effect on March 16th, 2020.

New Worker Status Final Rule

As mentioned earlier, the new final rule clarifies the standard for employee versus independent contractor. In the rule, the DOL:

  • Reaffirms an “economic reality” test to determine whether an individual is in business for him or herself. That, in turn, would designate whether an individual qualifies for independent contractor status or not. On the other hand, if the individual is economically dependent on an employer for work they would be an employee.
  • Identifies two “core factors” to determine whether a worker is economically dependent on someone else’s business or works for themselves:
    • The nature and degree of control over the work.
    • The worker’s opportunity for profit or loss based on initiative and/or investment.
  • Lists three other factors that may serve as additional guideposts in a status analysis. The analysis can assist when the two core factors listed above do not point to the same classification. The other 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 employer is more relevant than what may be contractually or theoretically possible.
  • Provides six fact-specific examples applying the factors.

The rule takes effect 60 days after publication on the Federal Register, on March 8th, 2021.

Employer Takeaways

Since its original release, many labor unions have opposed the rule. Consequently, the final rule could face legal challenges before its March 8 effective date. Additionally, some officials within the incoming Biden administration have expressed opposition. Employers, as of now, should prepare for the rule to effect on March 8. In the meantime, all covered employers should be following worker status regulations currently included in the FLSA.