DOL Proposes Rule to Clarify Employee and Independent Contractor Status Under FLSA

February 2021

The U.S. Department of Labor on Jan. 6 announced a proposed rule clarifying the definition of employee under the Fair Labor Standards Act as it relates to independent contractors.
    
“The department’s proposal aims to bring clarity and consistency to the determination of who’s an independent contractor under the Fair Labor Standards Act,” said Secretary of Labor Eugene Scalia. “Once finalized, it will make it easier to identify employees covered by the act, while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.”
    
“The rule we proposed today continues our work to simplify the compliance landscape for businesses and to improve conditions for workers,” said Wage and Hour Division Administrator Cheryl Stanton. “The department believes that streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency and increase job satisfaction and flexibility.”
    
The proposed rule would accomplish the following:

  • Adopt an “economic reality” test to determine a worker’s status as an FLSA employee or an independent contractor. The test considers whether a worker is in business for himself or herself (independent contractor) or is economically dependent on a putative employer for work (employee).
     
  • Identify and explain two “core factors,” specifically 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 help determine if a worker is economically dependent on someone else’s business or is in business for himself or herself.
     
  • Identify three other factors that may serve as additional guideposts in the analysis: 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.
     
  • Advises that the actual practice is more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.