On January 6, 2021, the U.S. Department of Labor (“DOL”) announced its final rule which clarifies the standard employed in determining whether a worker may be classified as an independent contractor versus an employee under the Fair Labor Standards Act (“FLSA”). The effective date for the final rule is March 8, 2021, and reaffirms the use of the “economic reality” test for determining whether an individual is in business for themselves and therefore is an independent contractor or is economically dependent on a potential employer and therefore is classified as an employee under FLSA.
The final rule explains that two core factors are considered in determining an individual’s status:
- The nature and degree of control over the work, and
- The worker’s opportunity for profit or loss based on initiative and/or investment.
The first factor weighs in favor of an individual being classified as an independent contractor to the extent the individual exercises substantial control over the performance of their work, i.e. setting their own schedule, selecting their own projects, and determining whether to work with others including the employer’s competitors. Similarly, the second factor, the opportunity for profit or loss, militates in favor of a finding that an individual is an independent contractor if the individual has the opportunity to maximize his/her profit in reference to the work performed for the employer by exercising initiative, cutting costs, employing specialized equipment, and/or optimizing staff assigned to the work. Similarly, evidence that an individual incurred a loss as a result of a failure to exercise such initiative weighs in favor of a finding that the individual is an independent contractor.
The final rule also explains that there are additional factors that may be considered when the two core factors do not point to the same classification; these 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, and
- Whether the work is part of an integrated unit of production.
While the final rule announced by DOL is less strict than the standard previously employed to determine employee versus independent contractor status, employers should note the final rule is only applicable to determinations under FLSA and a more stringent standard applies to similar determinations under Maryland law.
If you have questions relating to employee classification, PK Law has experienced labor and employment counsel who are prepared to assist in reviewing independent contractor classifications. Compliant independent contractor classifications are critical for employers seeking to avoid the expense associated with costly administrative enforcement actions and misclassification claims.