The U.S. Department of Labor released a final rule Jan. 6 that clarifies when a worker is an independent contractor versus an employee under the Fair Labor Standards Act.
The rule will help employers determine their workers’ “employee” status, a classification that impacts minimum wage, overtime pay, and recordkeeping responsibilities.
The final rule reaffirms that DOL will use an “economic reality” test to determine employee status.
“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- or herself (and is thus an independent contractor),” according to the executive summary.
Two core factors will be most probative to the question of whether a worker is economically dependent on a potential employer—the nature and degree of control over the work, and the worker’s opportunity for profit or loss.
Three other factors provide additional guideposts:
- The amount of skill required for the work
- The degree of permanence of the working relationship
- Whether the work is part of an integrated unit of production
While the FLSA itself does not define the term “independent contractor,” DOL has long held that the determining standards should evaluate the extent of the worker’s dependence on the potential employer.
The problem in the past, the department said, is that the methods used to determine employee status “have not always been sufficiently explained or consistently articulated by courts or the department,” thus confusing the regulated community.
“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,” Labor Secretary Eugene Scalia said in a statement.
The U.S. Chamber of Commerce praised the final rule for providing employers a “balanced analysis” and a “modern interpretation of what it means to be an independent contractor.”
While this final rule provides clarity on the department's evaluation of employee/contractor status, employers should be mindful that the IRS still uses the “common law” test, which analyzes a variety of factors that focus on the extent of a worker’s control over his work.
The final rule takes effect March 8.