There has been a lot of confusion concerning the Final Rule introducing Part 795 of CFR Title 29 and expressly adopting the long-standing economic realities test for evaluating independent contractor status under the Fair Labor Standards Act (FLSA). Under the proposed rule, the U.S. Department of Labor (DOL) narrowed the interpretation of the independent contractor status under the FLSA.
The FLSA requires covered employers to pay their non-exempt employees at least the Federal minimum wage for every hour worked and overtime pay for every hour worked over 40 in a workweek and keep certain records regarding their employees. A person who performs services for an individual or entity as an independent contractor is not considered as an employee under the Act. Thus, the FLSA does not require employers to pay an independent contractor either the minimum wage or overtime pay, nor does it require that person to keep records regarding that independent contractor. Courts and the DOL, however, require an evaluation of the extent of the worker’s economic dependence on the potential employer and have developed a multi-factor test to analyze whether a worker is an employee or an independent contractor under the FLSA.
The Final Rule attempted to limit the economic realities inquiry into whether the worker is considered to be a pseudo employee or an independent contractor to the following five factors (as opposed to the previous tests used by the DOL, IRS and federal courts):
These proposed five factors were not exhaustive, and no single factor was dispositive, but the degree of control and opportunity for profit or loss were typically given greater weight as the “most probative” “core factors”. If both core factors supported the same classification, independent contractor or employee, there was a “substantial likelihood” that the classification was appropriate.
The proposed rule also provided several illustrative examples, including a tractor-trailer owner-operator, an app-based home repair service worker, home renovation and repair services worker, a seasonal resort housekeeper, a part-time editor, and a freelance journalist.
The DOL intended for employers, employees, and courts to use the interpretations to better understand employers’ obligations and employees’ rights under the FLSA while rescinding any conflicting prior administrative rulings, interpretations, practices, or enforcement policies were expressly rescinded. (29 C.F.R. §§ 795.100 to 795.120.)
The rule was first published on January 7, 2021 and was scheduled to take effect on March 8, 2021. However, in a Final Rule published on March 4, 2021, the DOL under the Biden administration delayed the effective date until May 7, 2021 but later announced a withdrawal of the independent contractor Final Rule effective May 6, 2021. The agency did not propose new rulemaking.
Employers should consult employment counsel concerning developments affecting independent contractor classification under the Biden administration, including any new rulemaking.