In response to the Department of Labor's announcement regarding an amendment to the Fair Labor Standards Act, attorney Meredith Riggs Guerrero has published an essay to help employers and independent contractors better understand these changes.
Read her full article below.
Department of Labor Withdraws FLSA Independent Contractor Rule
On May 5, 2021, the U.S. Department of Labor (DOL) announced that it will formally withdraw the Independent Contractor Rule that it just put into effect just a few months ago, on March 8, 2021 in an effort to provide a formalized definition for independent contractor for purposes of the Fair Labor Standards Act (FLSA).
Why Classification Matters
As employers are aware, determining whether to classify a worker as an independent contractor or an employee is an important decision for a business that must be carefully considered due to the implications it has on how the worker must be paid. While the minimum wage and overtime requirements of the FLSA do not apply to independent contractors, the FLSA requires employers to pay employees a minimum hourly wage for the time they work, plus overtime pay for time they work beyond 40 hours in a workweek, unless their job duties meet one of the statutorily-defined exemptions to the FLSA's overtime requirement. In addition, employers must pay payroll taxes for wages they pay to employees, but not on amounts paid to independent contractors.
Defining Who Qualifies as an "Independent Contractor"
The FLSA does not provide a definition for independent contractor. However, over the years since the FLSA was enacted, the courts have developed a test for determining whether a worker qualifies as an independent contractor. Among the factors that courts historically focused on in making this determination are:
1. The extent to which the services rendered are an integral part of the principal's business.
2. The permanency of the relationship.
3. The amount of the alleged contractor's investment in facilities and equipment.
4. The nature and degree of control by the principal.
5. The alleged contractor's opportunities for profit and loss.
6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
7. The degree of independent business organization and operation.
New Rule: Still TBD
In September 2020, the DOL announced a proposed rule that would, first the first time, define by way of a test whether workers are employees or independent contractors under the FLSA. The proposed change would base classification on an "economic reality test" that put the majority of weight on two core factors to determine if workers are economically dependent on someone else: (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 the initiative and/or investment of the worker. If those two core factors were not determinative, then three additional factors can be considered: (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 final Independent Contractor Rule went into effect on March 8, 2021. However, just days later, on March 12, 2021, the DOL issued a notice of proposed rulemaking (NPRM) proposing to withdraw the Independent Contractor Rule. After reviewing approximately 1,000 comments that were submitted in response to the NPRM, the DOL announced on May 5, 2021 that it would formally withdraw the Independent Contractor Rule effective May 6, 2021. The DOL stated that it has determined that the Rule is inconsistent with the FLSA's purpose and the express language of the statute, as well as years of judicial decisions interpreting the FLSA. The DOL also stated that the Independent Contractor Rule and would likely confuse both workers and businesses who have looked to the test created by the courts for many years.
Bottom Line: The court-developed test for determining when a worker is an independent contractor remains in place. If you have questions regarding employee classification or status, we can help.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.