U.S. Department of Labor Issues Final Rule To Clarify Independent Contractor Status

WASHINGTON, DC – The U.S. Department of Labor today announced on Jan. 6 a final rule clarifying the standard for employee versus independent contractor status under the Fair Labor Standards Act.

“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.”

“Streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency and increase job satisfaction and flexibility,” said Wage and Hour Division Administrator Cheryl Stanton. “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.”

The Final Rule 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:

• 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.

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

The U.S. Chamber of Commerce applauded the Department of Labor’s final rule on the determination of independent contractors.

“The new regulation provides a balanced analysis for determining when a worker is an independent contractor or employee under the FLSA,” said Glenn Spencer, senior vice president of employment policy at the U.S. Chamber. “By giving employers and employees greater clarity, and providing a modern interpretation of what it means to be an independent contractor, the regulation will increase the opportunities for single parents to control their schedules and raise their kids, ex-offenders to reenter the workforce, and help military spouses generate earnings as they move from place to place.”

He added, “The statutes around independent contracting are decades old and don’t reflect changes in technology, the workplace, or current workplace structures. The department’s rulemaking is an important step, but Congress should go even further and update our laws for the 21st Century.”