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U.S. Department of Labor Issues Final Rule on Independent Contractor Status
U.S. Department of Labor Issues Final Rule on Independent Contractor Status
On January 7, 2021, the U.S. Department of Labor (DOL) published its final rule (Final Rule) setting new standards for determining when a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The Final Rule takes effect sixty days from its publication in the Federal Register and is, therefore, scheduled to take effect on March 8, 2021. The DOL notes that the Final Rule reaffirms the economic reality test; however, the new test changes the analysis to be used when applying the test.

New Test
The Final Rule implements a five-factor economic reality test; however, those factors are split into two core factors and three guiding factors. The DOL explains that the economic reality test requires that a workers economic dependence on the employer is measured primarily by two core factors, although three other factors may be considered if needed. While no one factor is considered dispositive on its own, the Final Rule states that the two core factors are the most probative.

Two Core Factors: 
The two core factors of the new DOL economic reality test are as follows:
  • The nature and degree of the workers control over the work. DOL examples of facts more indicative of contractor status include: (1) workers setting their own work schedule; (2) workers selecting their own assignments; and (3) workers retaining the ability to work for others.
  • The workers opportunity for profit or loss. DOL examples of facts more indicative of contractor status include: (1) the exercise of personal initiative, including managerial skill or business acumen; and/or (2) the management of investments in or capital expenditure on items such as helpers, equipment, or material.

Three Guiding Factors:
The three guiding factors of the economic reality test, which are to be applied if the core factors are not determinative, are as follows:

  • The amount of skill required for the work. An analysis should be done of whether the work requires a specialized training or skill or whether the worker depends on the employer for training? If the employer provides the training, the worker is more likely an employee.
  • The degree of permanence of the working relationship between the worker and the potential employer. An analysis should be done as to whether the work is of a definite and longer-term duration or sporadic and short-term? A working relationship that is indefinite in duration or continuous suggests that the worker is an employee.
  • Whether the work is part of an integrated unit of production. The Final Rule looks at whether the work is a component of the potential employers integrated production process for a good or service. The more integrated the work, the more likely the worker is an employee.
The Trump administration fast-tracked the DOLs rulemaking process after the Final Rule was proposed in September of 2020. It is anticipated that the Biden administration will takes steps to withdraw or change the Final Rule. The new administration may be able to delay the effective date of the rule by up to 60 days. During any postponement, the Biden administration could seek to propose a new rule or repeal the Trump administration Final Rule through the administrative rule-making process.
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