On January 6, 2021, the United States Department of Labor (DOL) announced a final rule explaining the standard to determine who is an employee (and therefore protected under the Fair Labor Standards Act (FLSA)) and who is an independent contractor not entitled to FLSA protection. This rule, which formally will be published on January 7th and then will become effective March 8, 2021, will impact the landscape of employer/employee versus independent contractor relationships.
First, the DOL reaffirmed that it’s the economic realities standard that’s used to determine a worker’s classification. This standard uses the reality of a person’s economic status to determine whether she properly should be treated as an employee or an independent contractor.
Factors in Determining Worker Classification: The rule reminds companies that the two most important factors in determining worker classification are (1) the level of control over the worker and (2) the “worker’s opportunity for profit or loss based on [her] initiative and/or investment.”
If the two factors don’t conclusively establish employee versus independent contractor, then the next step is to consider some additional factors, such as
- how much skill is required for the work,
- whether the working relationship is permanent, and
- whether the work performed is “part of an integrated unit of production”
Importantly, remember that the actual practice between the worker and the potential employer is more important than what the contract or writing between the parties say or what, for example, might be theoretically possible.
What’s the consequence? Plainly, it’s how the company and the worker actually act that’s dispositive. You can’t hide behind contracts or wishful thinking.
There are significant financial consequences if your company chooses the wrong classification. So if you have questions, concerns, or are unsure about whether your workers should be classified as employees or independent contractors, our team can assist.