On Jan. 7, 2021, the U.S. Department of Labor (DOL) published a final regulation¹ regarding the determination of independent contractor status for purposes of the Fair Labor Standards Act (FLSA), including its minimum wage and overtime provisions. The final rule is intended to clarify the DOL’s interpretation of the factors regarding an individual’s classification as an employee or an independent contractor under the FLSA rules. Many see the final rule as part of the on-going discussion of whether gig workers are classified as independent contractors or as employees.

For every hour worked, employers covered by the FLSA are required to pay their nonexempt employees the Federal minimum wage and overtime pay for hours worked over 40 in a workweek. In addition, these employers are required to keep certain records with regard to those employees. However, those FLSA requirements do not apply to individuals performing services as an independent contractor.  

The FLSA does not define an independent contractor. The final rule outlines multiple factors that have been developed by the DOL to assist in determining whether a worker should be treated as an employee or an independent contractor under the FLSA rules. The factors are intended to assist in a determination as to whether, as a matter of “economic reality”, individuals are employees or are in business for themselves and are therefore considered independent contractors. The final rule explains that employees are generally considered to be economically dependent on their employers for work. Conversely, independent contractors are not since they are in business for themselves.

The economic reality factors

The final rule details certain economic reality factors to aid in the determination of the relationship, including two core factors that are considered to be the most indicative of whether there is an employee or independent contractor classification. The factors include the following:

Core Factors

• The nature and degree of the control over the work – The extent to which the potential employer exercises substantial control over the key aspects of the performance of the work such as setting the schedule or workload, selecting the projects or restricting the individual’s ability to work for other potential employers.
• The individual’s opportunity for profit or loss – The extent to which the individual’s managerial skills can control their income by the exercise of their own initiative including management of their work, the ability to work more hours or the pace of their work.

Other Factors

• The amount of skill required for the work – The extent to which the individual must rely on the potential employer to provide the skills necessary to perform the job.
• The degree of permanence of the working relationship – The extent to which the job is designed to be indefinite or continuous in nature as opposed to sporadic or seasonal.
• Whether the work is part of an integrated unit of production – The extent to which the work performed is a component part of the potential employer’s integrated production process for goods or services.
• Additional factors – Other factors that may be relevant in making the determination.

The DOL has indicated that the factors are not exhaustive and that no specific factor is determinative. However, the two core factors are likely to be more conclusive as to the individual’s classification. The final rule may also assist in classifying the status of gig workers as independent contractors rather than as employees. 

The final rule (which updates a proposed rule released on Sept. 25, 2020) is effective on March 8, 2021.

Regulatory freeze

It is anticipated that the Biden Administration may postpone or delay the Final Regulation’s effective date beyond March 8, 2021, and may ultimately repeal it. In recent years, incoming presidents have issued executive orders shortly after inauguration day directing federal agencies to delay by 60 days the effective dates of all finalized but not-yet-effective agency rules. The final rule falls into this category because, while published in the Federal Register as final, it is not effective until after the inauguration. The Administrative Procedure Act² provides a rulemaking process for repealing or replacing such agency rules,³ generally requiring a notice and comment period and review by the Office of Management and Budget, although a number of exceptions may apply. In certain instances, a new administration may delay or repeal a final agency rule by submitting it to Congress under the Congressional Review Act’s “fast track” procedures⁴ and to seek Congress’s adoption (by majority vote) of a joint disapproval resolution nullifying the rule.

The Biden Administration is also expected shortly after inauguration day to issue a memorandum to Federal agencies to halt and review regulations and guidance that is in process and has not been published as final in the Federal Register.

Employers will need to stay abreast of the future effective date, interim changes or delays and have an understanding of whether any internal practices or reporting will be affected. Note that these rules are distinguishable from the IRS rules regarding employee versus independent contractor status for purposes of Federal income tax reporting and withholding.

¹ 29 CFR Parts 780, 788 and 795  

² 5 U.S.C. section 551 et seq.

³ 5 U.S.C. section 551(5).

⁴ 5 USC section 801 et seq. (1996)