On January 2, 2021, the U.S. Department of Labor (DOL) issued a final rule for distinguishing independent contractors from employees under the Fair Labor Standards Act (FLSA). Worker classification is important for determining pay obligations under the FLSA—while an employee covered by the FLSA may be entitled to federal minimum wage, overtime pay and other federal employee benefits, an independent contractor cannot claim these benefits and protections without agreement by the party for whom the independent contractor is working.
The rule reaffirms the “economic reality” test to determine whether a worker is dependent on an employer for work as an employee or is in business for him or herself as an independent contractor. Although the rule includes five factors for determining independent contractor status, two core factors are given the most weight: (1) the nature and degree of the worker’s control over the work, and (2) the worker’s opportunity for profit or loss based on initiative and investment. Three less important factors may also provide guidance, if needed: (1) the amount of skill required for the work, (2) the degree of permanence of the working relationship between the worker and the potential employer and (3) whether the work is part of an integrated unit of production.
The rule was scheduled to take effect on March 8, 2021; however, President Biden’s Chief of Staff issued a memorandum, entitled Regulatory Freeze Pending Review, encouraging executive departments and agencies to postpone the effective date of certain rules that have not yet taken effect for 60 days from January 20, 2021, and to consider opening a 30-day public comment period. The 60-day delay allows the new administration time to review pending regulations.
As a result, the DOL has proposed to delay the effective date of the rule to May 7, 2021, and the DOL will accept public comments on the proposed delay through February 24, 2021. Although the rule hangs in the balance, employers should continue to ensure proper classification of all workers in accordance with the FLSA to avoid any enforcement actions or other worker misclassification penalties.