The U.S. Department of Labor issued a
The rule is one of many contentious regulations that the Trump administration has been rushing to finalize in its waning days and is likely to have an impact on labor relations, pay scales and benefits for workers. It also has an impact on the taxes they pay and whether taxes need to be withheld from their paychecks or simply reported on a Form 1099 and sent to them before Jan. 31. More companies in recent decades have been classifying their workers as independent contractors as opposed to full-time employees to save on salaries and benefits, and that trend has only accelerated in recent years with the growth of the gig economy.
Officials said the rule would bring needed clarity to the standards under the Fair Labor Standards Act, or FLSA. “This rule brings long-needed clarity for American workers and employers,” said U.S. Secretary of Labor Eugene Scalia in a statement. “Sharpening the test to determine who is an independent contractor under the Fair Labor Standards Act makes it easier to identify employees covered by the Act, while recognizing and respecting the entrepreneurial spirit of workers who choose to pursue the freedom associated with being an independent contractor.”
- It reaffirms an “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).
- It identifies and explains two “core factors” that are most relevant to the question of whether a worker is economically dependent on someone else’s business or is in business for themselves:
- The nature and degree of control over the work;
- The worker’s opportunity for profit or loss based on initiative and/or investment.
- It identifies three other factors that may serve as additional guideposts in the analysis, particularly when the two core factors do not point to the same classification. The factors are:
- The amount of skill required for the work;
- The degree of permanence of the working relationship between the worker and the potential employer;
- Whether the work is part of an integrated unit of production.
- The actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
- It provides six fact-specific examples applying the factors.
“Streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility,” said DOL Wage and Hour Division administrator Cheryl Stanton in a statement. “The rule we announced today continues our work to simplify the compliance landscape for businesses and to improve conditions for workers. The real-life examples included in the rule provide even greater clarity for the workforce.”
The rule may face legal challenges as it has been opposed by labor unions. Some officials in the incoming Biden administration have also expressed their opposition, so it could be nullified or rolled back before it takes effect on March 8. Nevertheless, it does provide some guidance in a complex area.
“Regardless of the formalistic, official impact of the rule, I think that it provides sound, evenhanded guidance as practitioners like accountants and CPAs try to understand the impact, or how different facts should be viewed under the different tests, so it's illustrative and it's helpful analysis,” said Camille Olson, co-chair of the law firm Seyfarth's National Complex Litigation practice group, and national chair of its Complex Discrimination Litigation practice group.
