Learn how the FLSA rule for worker classification works and what the implications are for companies.

On January 7, 2021, the U.S. Department of Labor (DOL) published a final rule under the Fair Labor Standards Act (FLSA) regarding whether a worker should be classified as an employee or an independent contractor. This rule, known as the Independent Contractor Rule, was intended to bring clarity to the classification standards. It was also in part a response to laws such as California’s AB5. The rule was scheduled to go into effect as of May 7, 2021. However, the Department of Labor announced a final rule on May 5, 2021, withdrawing the proposed rule.

Economic Reality Test for the Fair Labor Standards Act (FLSA)

The withdrawn rule under the FLSA would have reaffirmed the current “economic reality” test to determine “whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).” The rule identified factors for determining worker classification.

Core Factors for the withdrawn FLSA Rule

The rule included “core factors” to determine worker classification. So these factors would have been the primary determinants of whether workers are economically dependent on someone else’s business or in business for themselves. The two core factors are:

1. Nature and degree of control over the work performed

2. Opportunity for profit or loss by the worker based on initiative and/or investment

Secondary Factors for the withdrawn FLSA Rule

There are also 3 secondary factors that would have been considered in worker classification analysis, particularly if the 2 core factors didn’t yield the same conclusion regarding classification.

1. Amount of skill required for the work

2. Degree of the permanence of the working relationship between the worker and the potential employer

3. Whether the work is part of an integrated unit of production

Implications of the Fair Labor Standards Act (FLSA) Rule

Due to the rule withdrawal, the proposed test and factors do not apply to businesses. Instead, the prior “economic reality” guidance from the DOL regarding the classification of employees and independent contractors under the FLSA remains in effect. Under the FLSA, an employee “is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves.”  

Current US Supreme Court rulings indicate that for the purposes of FLSA there is no single test or rule that distinguishes whether an individual is an employee or an independent contractor. However, the Court considers the following factors significant:

1. Extent to which the services rendered are an integral part of the principal’s business

2. Permanency of the relationship

3. Nature and degree of control by the princial

4. Alleged contractor’s opportunities for profit and loss

5. Amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor

6. Degree of independent business organization and operation

But this FLSA economic reality guidance does not replace laws passed by state and local governments. So this means that relevant state and local laws for worker classification, such as California’s AB5 or New York City’s FIFA, still apply.

Ready to pay your contractors while staying compliant with freelancer regulations? Try Liquid today.

#ClientResources #FreelancerManagement