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In the first days of 2021, the Department of Labor (DOL) signed into law a final rule aimed at clarifying the difference between independent contractors and employees under the Fair Labor Standards ACT (FLSA).
The final rule, Independent Contractor Status under the Fair Labor Standards Act, takes effect on March 8, 2021, and makes clear distinctions for classifying workers as either independent contractors or employees. Some of the key additions as cited from the DOL include the following:
- Reaffirms an “economic reality” test to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).
- Identifies and explains two “core factors” that are probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself including; the nature and degree of control over the work; and the worker’s opportunity for profit or loss based on initiative and or/investment.
- Identifies three other factors that may serve as additional guideposts in the analysis, particularly when the two core factors do no point to the same classification. The factors 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.
- The actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
- Provides six fact-specific examples applying the factors.
For more information on the final rule, head to the federal register’s official rule.
Former U.S. Secretary of Labor Eugene Scalia said, “This rule brings long-needed clarity for American workers and employers.” He adds, “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 rule comes into play as a result of activity surrounding the gig economy and the endless number of court cases and lawsuits many gig economy companies, like Uber are continuing to experience.
While the final rule does make clear the distinction in classifying a worker as an independent contractor or employee, other states and local legislation have much more restrictive laws. For example, California’s AB 2257 utilizes the ABC test, which certifies that an individual providing services is presumed to be an employee unless all of the following requirements are met:
- The worker is free from control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact
- The worker performs work that is outside the usual course of the hiring entity’s business,
- The worker is customarily engaged in an independent established trade, occupation, or business of the same nature as the work performed
Employers with operations in California looking to use the federal law as a defense for classifying a worker as an independent contractor should take note of the nuances surrounding the state legislation as this new federal rule is not likely to remain. With the Biden Administration now in office and a Democrat majority in Congress, the final rule amended to the FLSA will likely see continued change. Biden has said that he will “put a stop to employers intentionally misclassifying their employees as independent contractors. He will enact legislation that makes worker misclassification a substantive violation of law under all federal labor, employment, and tax laws with additional penalties beyond those imposed for other violations”
What this means for employers is that despite the new federal rule on distinguishing employees and independent contractors, your organization should be forward-thinking when classifying workers and err on the side of the broader legislation (e.g., California). The United States is moving largely towards a more equal and fair work environment for people operating in the gig economy, employers should ensure that they are properly classifying workers. Employment classification, exemption status, and wage determination legislation are becoming more stringent. Failing to comply with the FLSA, the Equal Pay Act (EPA) and other employee protection laws could be costly for organizations.
HR managers should be prepared to prove that they are classifying their employees correctly. And with pay data reporting coming into effect this year, best practices suggest undergoing a proactive comprehensive pay equity audit. Contact us for a free pay equity consultation.
To learn more about achieving pay equity, click here.