On Jan. 6, 2021, the U.S. Department of Labor (DOL) issued a final rule that clarifies how to determine whether a worker is an employee who is protected under the Fair Labor Standards Act (FLSA) or an independent contractor who is exempt from it.
As published, the final rule is scheduled to become effective March 8, 2021. However, on Jan. 20, 2021, President Joe Biden issued a regulatory freeze on this and other regulations adopted during the last few weeks of the Trump administration. In addition, on Feb. 5, the DOL proposed to delay the final rule’s effective date to May 7, 2021.
“Economic Reality” Test Reaffirmed
The final rule reaffirms an existing test under which employers must consider whether, as a matter of economic reality, there is dependency in the employment relationship they have with their workers (workers are not truly in business for themselves). Test factors include:
- The nature and degree of control over the work;
- The worker’s opportunity for profit or loss based on initiative and/or investment;
- 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 top two factors are considered “core factors” for this test. However, the final rule emphasizes that actual practice, rather than contractual or theoretical agreements, is more relevant.
Finally, employers should remember that employment relationships are dynamic and need to be evaluated regularly for possible worker classification changes.