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Department of Labor Issues Final Rule on Independent Contractor Status under the Fair Labor Standards Act

Introduction to the Fair Labor Standards Act

The Fair Labor Standards Act (“FLSA”) is a federal law which requires certain employers to pay non-exempt employees the federal minimum wage (currently $7.25 per hour) and/or overtime at time-and-a-half for all hours worked in excess of forty (40) in a given week. In addition to addressing matters regarding pay, the FLSA also contains a provision regarding employer retaliation. The FLSA provisions are enforced by the Department of Labor’s (“DOL”) Wage and Hour Division.

DOL Final Rule

Pursuant to the FLSA, an independent contractor is not an employee and, therefore, not subject to the FLSA’s protections. On January 6, 2021, the DOL announced a final rule updating the Code of Federal Regulations (“CFR”), thereby clarifying the standard for determining whether an individual is an employee or an independent contractor when examining potential FLSA violations and/or compliance.
As a result of the final rule, the following items will be changed and/or clarified in the applicable CFRs as it pertains to independent contractors: (i) the “economic reality” test will be reaffirmed; (ii) two “core factors” probative of the existence of economic dependence will be added; (iii) guidepost factors will be added; (iv) the relevance of certain practices will be clarified; and (v) six (6) fact-specific examples applying the relevant factors will be added for reference. The final rule will not actually take effect until March 8, 2021.

The Economic Reality of an individual’s work

When determining whether an individual is an employee or independent contractor, the individual’s economic dependence on the employer is the ultimate inquiry. Under the FLSA, an “employee” is an individual whom an employer suffers, permits, or otherwise employs to work. An employer suffers or permits an individual to work as an employee if, as a matter of economic reality, the individual is economically dependent on that employer for work. An individual is an independent contractor if the individual is, as a matter of economic reality, in business for him or herself. Thus, if the individual is dependent, he/she is an employee, but if the individual functions independently and does not rely upon the employer, he/she is an independent contractor.

Relevant factors under the DOL’s final rule.

Although the factors for determining economic reality are not exhaustive and no single factor decides the inquiry, the final rule sets forth two (2) core factors that are most probative regarding whether or not an individual is an economically dependent “employee.” The core factors are (i) the nature and degree of control over the work, and (ii) the individual’s opportunity for profit or loss. If both factors point towards the same classification – whether independent contractor or employee – there is a substantial likelihood that the corresponding classification is correct. Although these two (2) factors are most probative, there are also additional factors articulated in the final rule, which act as “guideposts.” These “guidepost” factors include but are not limited to the following: (i) the amount of skill required for the work; (ii) the degree of permanence of the working relationship between the individual and the potential employer; and (iii) whether the work is part of an integrated unit of production.

If you feel your rights have been violated under the FLSA or if you have any other questions regarding your employment rights, please contact the experienced Birmingham employment law attorneys at Wrady Michel & King. You can contact us either online or by calling us at (205) 319-9724. We are here to serve you.