On January 6, 2021, the U.S. Department of Labor, Wage and Hour Division announced a final rule clarifying whether an individual is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The rule:
- Reaffirms the “economic reality” test which determines whether an individual is in business for themselves (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).
- Identifies and explains two core factors to determine whether a worker is economically dependent on someone else’s business (employee) or is in business for themselves (independent contractor):
- The nature and degree of control over the work; and
- The worker’s opportunity for profit or loss based on initiative and/or investment.
If those two primary core factors do not point to the same classification, then the rule identifies the following additional factors to determine status:
- 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 rule also:
- Identifies that 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.
The rule is effective March 8, 2021.