Department of Labor Issues “Final” Rule on Employee Status

On January 6, 2021, the Department of Labor (“DOL”) issued its new rule (the “Rule”) regarding the test for determining whether an independent contractor classification is appropriate under the Fair Labor Standards Act (“FLSA”).  In general, the Rule focuses on whether purported contractors are in business for themselves and whether they are economically dependent on employers for work.  This revised “economic reality” test is currently scheduled to take effect on March 8, 2021.

More specifically, the Rule sets forth five factors to be considered when determining contractor status.  As under prior versions of this test, no single factor is dispositive.  Unlike prior guidance, however, the DOL has specifically stated that there are two “core factors” that carry greater weight than the others.  The two main factors are:

(1) Control: If an individual has more control over the work he or she performs, he or she is more likely to be an independent contractor, and vice versa.

(2) Profit opportunity: If an individual has little opportunity for profit or loss based on initiative and/or investment, he or she is more likely to be an employee, and vice versa.

The other “non-core” factors that should also be considered are:

(3) Skill: The amount of skill required for the work;

(4) Permanence: The degree of permanence of the working relationship; and

(5) Integration: Whether the work is part of an integrated unit of production.

Interestingly, the DOL also stated that a company’s provision of health, retirement and other benefits is not, by itself, determinative as to a worker’s status.  Instead, the provision of such benefits is part of the facts and circumstances to be considered in applying the Rule.  Note that providing health, retirement or other benefits still involves a substantial misclassification risk.  For example, in explaining the Rule, the DOL states that allowing a worker to participate in the same health or retirement plans or on the same terms as benefits are made available to the company’s employees could indicate employee status, rather than independent contractor status. 

Although the DOL implemented this “final” Rule to resolve issues over employee status and provide clearer guidance to employers, the longevity of this Rule is unclear.  With the change of administration, it is possible that this Rule may change again.  Moreover, this Rule represents just one of several different contractor tests, as there are different laws prevalent in various states and in other contexts.  Because of this complex patchwork of guidance regarding employee and independent contractor status, any classification decision should be made with care.  If you have questions about this or any other workforce issue, contact your relationship attorney or one of Honigman’s Labor and Employment attorneys.