The U.S. Department of Labor (“DOL”) published a final rule addressing independent contractor status under the Fair Labor Standards Act (“FLSA”). Independent contractor status is a critical question under the FLSA because eligible employees are entitled to the law’s protections (for example, minimum wage and overtime for non-exempt employees) but independent contractors are not. Incorrectly classifying workers is a common cause of expensive class action lawsuits and can lead to payment of back wages and substantial penalties. The final rule seeks to clarify the test that courts use to determine a worker’s employment status, which should facilitate predictability for employers.
The final rule is scheduled to become effective on March 8, 2021 (60 days after its publication in the Federal Register). Here are the most critical aspects of the new rule:
Economic Realities Test Codified. The DOL has long used the multi-factor “economic realities” test to determine whether an individual is an employee or an independent contractor. Generally, the economic realities test considers whether the individual is dependent on a particular business or organization for work (and is therefore an employee) or instead is in business for themselves (and is therefore an independent contractor). The DOL has historically relied on the economic realities test as a matter of administrative practice; the new rule represents the first time that it has been formalized in a rule. Per the DOL, it chose to codify the economic realities test in a rule because courts and enforcement agencies have long applied it inconsistently, leading to confusion for employers trying to predict whether a worker is an employee or independent contractor under the FLSA. Continue Reading