DOL Proposes New Rule on Classification of Independent Contractors Under FLSA

January 25, 2021
Hall Benefits Law, LLC

On September 22, 2020, the U.S. Department of Labor (DOL) released a proposed rule that establishes new standards for employers in determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA).

The proposed rule provides employers with long-awaited clarity on the classification of workers under the FLSA. The absence of federal guidelines on classification standards for independent contractors has given rise to differing tests and rules across states and in federal courts, further confusing the issue for employers that can face substantial penalties for misclassifying employees as independent contractors.

Five-Factor Test

The DOL’s proposed rule:

  • Adopts an “economic reality” test to determine a worker’s status as an employee or an independent contractor. The test considers five factors as to whether a worker is in
    business for her/himself (independent contractor) or is instead economically dependent on a putative employer for work (employee);
  • As part of those five factors, the DOL identifies and explains two “core factors,” specifically: (1) the nature and degree of the worker’s control over the work and (2) the worker’s opportunity for profit or loss based on initiative and/or investment. These core factors are given greater weight in determining if a worker is economically dependent on someone else’s business or, as a matter of economic reality, is in business for themselves;
  • Identifies three other factors that may serve as additional guideposts in the analysis of economic dependence, including: (1) the amount of skill required for the work, (2) the degree of permanence of the working relationship between the worker and the potential employer, and (3) whether the work is part of an integrated unit of production; and
  • Advises that the actual practice is more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.

The DOL emphasized that while no single factor is dispositive, the first two factors should be given the most weight. If both factors suggest the same classification, there is a “substantial likelihood” that the classification is correct.

Hall Benefits Law has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 678-439-6236.

The following two tabs change content below.

Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.