On January 6, the U.S. Department of Labor (DOL) issued a final rule clarifying how employers can determine if a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The rule takes effect on March 8.
In the final rule, the DOL:
- Reaffirms an “economic reality” test to determine whether an individual is in business for themself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).
- Identifies and explains two “core factors” that are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for themself:
- The nature and degree of control over the work.
- 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 not 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.
- 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.
Next Steps for Employers
While the new rule may provide some relief for employers, businesses should keep in mind that they would apply only under the FLSA, which governs federal minimum wage and overtime requirements. Stricter standards would continue to apply under many other federal laws (such as IRS) and under specific state laws. Where federal and state laws differ, employers will need to adhere to the law that provides the greatest benefit to the individual. Additional information on New York’s independent contractor rules may be found here.
Employers are encouraged to consult with their labor attorney and/or tax professional for guidance on proper classification of an independent contractor.