On January 6, 2021, the Department of Labor (DOL) delivered a final rule clarifying the standard classification for an employee versus an independent contractor under the Fair Labor Standards Act (FLSA). Under the FLSA, independent contractors are not eligible for minimum wage or overtime compensation, which are required for full-time employees. The new rule will go into effect on March 8, 2021 after president-elect Joe Biden assumes office, which does leave open the possibility of the incoming administration withdrawing or modifying this rule.
Many companies classify their workers as independent contractors as opposed to full-time employees in order to avoid paying larger salaries and providing their workers with benefits. This has accelerated in recent years with the rapid expansion of the gig economy.
The Fair Labor Standards Act (FLSA) defines an “employee” as “any individual employed by an employer,” but does not define or mention the role of an independent contractor. As such, classification between the two has been up to interpretation, establishing the need for the DOL to set rules on the legal status of independent contractors. Currently, courts look to the economic dependence of the contractor on their employer, and use a multi-factor test called the “economic realities test.” The new rule affirms this test as well as provides other means of classification.
Final Rule: Independent Contractor Status Under The FLSA
The new rule clarifies the standards for independent contractors under the FLSA. The final rule, which can be found here, includes the following clarifications for determining whether a worker is an employee or independent contractor:
- 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. (Which can be found here)
Implications of The New Rule
According to the Department of Labor, the goal of these clarifications is to reduce worker misclassification, increase efficiency, and increase both job satisfaction and flexibility. On the other hand, many labor unions oppose the rule and may press for legal challenges to the new clarifications. Unions claim that independent contractors are open to exploitation and left without the protections under employment law that full-time employees receive.
The reality is that independent contractors cost employers much less money, as they don’t need to provide benefits or pay into Social Security, unemployment insurance, workers’ compensation insurance, and more. Plus, regular employees trigger more complex regulation and reporting requirements.
While many workers do choose to be contractors — some for flexibility or lifestyle choices — many would like the security and benefits that go along with being a full-time employee. The status and classification of workers will continue to be litigated and fought over in 2021, and many workers are caught in between, in limbo.
Legal Support For Contractor Misclassifications
The Noble Law provides legal services to workers who find themselves trapped in the gig economy through improper employee misclassification or 1099 ContractorMisclassifications. While new standards, like the DOL’s new rule, are continuing to be created and put into effect, there is a patchwork of Federal and State laws that make it illegal for employers to misclassify employees as contractors and deny them the compensation, benefits, and rights of a full-time employee. If you believe that you have been misclassified as a contractor, schedule a consultation with one of our employment attorneys.