The U.S. Department of Labor (DOL) finalized a rule on Wednesday that revises the model for businesses to legally classify workers as independent contractors under the Fair Labor Standards Act (FLSA).
The rule will provide organizations across the United States a legal framework for classifying workers as independent contractors rather than employees, who are covered by federal minimum wage and overtime law. The new rule is considered a more employer-friendly interpretation of employee status under the FLSA than what was applied during the Obama administration.
The final rule does not contain any significant changes from the DOL’s proposed rule published in September.
“This rule brings long-needed clarity for American workers and employers,” said U.S. Secretary of Labor Eugene Scalia in a release. “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.”
The new rule adopts an “economic reality” test for determining which workers qualify as independent contractors. The test considers whether a worker is in business for themselves, rather than being “economically dependent on a potential employer for work.”
In its existing Fact Sheet #13 on the “Employment Relationship,” the DOL lists seven “economic reality” factors.
- The extent to which the services rendered are an integral part of the principal's business.
- The permanency of the relationship.
- The amount of the alleged contractor's investment in facilities and equipment.
- The nature and degree of control by the principal.
- The alleged contractor's opportunities for profit and loss.
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
- The degree of independent business organization and operation.
The new rule replaces this list of seven factors with two “core factors” and three “guidepost factors” for determining if the worker is economically dependent.
The two “core factors” are the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on initiative and/or investment. These factors, the DOL asserts, help determine if a worker is economically dependent on someone else’s business or is in business for themselves.
The three other factors that may serve as additional guideposts in the analysis 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.
“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 in the release. “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 rule is scheduled for publication in the Federal Register Jan. 7 and will take effect 60 days later.
About the Author
Brett Christie is the managing editor of Workspan Daily.