New Guidelines Published on Classifying Independent Contractors

Recently, the ability for businesses to properly classify employees has been a top priority for the U.S. Department of Labor (DOL). This has become even more of a pressing issue as changes in the economy and the COVID-19 pandemic have significantly propelled the growth in the number of gig economy workers. Businesses often use independent contractors because they can hire them for certain jobs or special projects without incurring the typical expenses associated with hiring full-time company employees. Simply put, the business gets the work it needs done without having to pay for things such as training, overtime and sick pay, workers’ compensation insurance and other benefits typically afforded full-time employees.

But within the past few years, issues have come about as to whether a worker is actually acting in the capacity of an independent contractor or in more of an employee role in which he or she would be entitled to workplace benefits. As a result, the DOL developed guidelines and tests for states to use under the Fair Labor Standards Act (FLSA) rule to assist businesses in making this determination. One such bill that gained nationwide attention in 2020 was California’s Assembly Bill 5 (AB5), also known as the gig worker bill. AB5 required companies that hire independent contractors to reclassify them as employees. However, after much controversy regarding AB5 and after several lawsuits were filed, the California legislature in September 2020 passed a revised bill that goes on to include a long list of job categories that are to be specifically excluded from AB5.

What’s new for 2021

Just a few weeks ago, the DOL further relaxed its interpretation of the FLSA’s classification provision.  On January 7, the DOL issued a new and final version of the FLSA rule that serves as a guide for employers to distinguish independent contractors from employees. As outlined by the DOL, the final rule 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-defined employee).

The rule, set to go into effect on March 8, explains how states are to use the economic reality test for classifying a worker as an independent contractor. The test lists the following five factors that businesses must consider:

1. The nature and degree of the individual’s control over the work.

2. The opportunity for profit or loss based on initiative, investment or both.

3. The amount of skill required to do the job.

4. The degree of permanence of the working relationship between the employer and worker.

5. Whether the work is part of an integrated unit of production.

To help businesses with the determination, the final rule presents six fact-specific examples for applying the five factors.

Conclusion

Although the final rule is set to go into effect on March 8, employers should stay updated on any subsequent changes or adjustments to the rule that may occur over the next 12 months and because certain state and local laws regarding the issue may still apply. It should also be noted that guidelines and laws can differ widely from state to state, so employers should understand what is applicable to where they do business. Your business clients can read more about the changes in the final rule and in the classification of independent contractor status by visiting the Federal Register archives and reading the January 6 U.S. Department of Labor press release.

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