UPDATE: As of May 2021, this rule has been rescinded. Click here for updated guidance.

On January 6, 2021, the U.S. Department of Labor (“DOL”) issued a final rule changing the standard determining if a worker is an employee or an independent contractor under the Fair Labor Standards Act (“FLSA”).[1] According to the DOL, the purpose of this change is to make it easier to identify which workers are employees covered by minimum wage, overtime, and other provisions of the FLSA. This new rule reaffirms an “economic reality” test to determine whether an individual is in business for himself (e.g., independent contractor) or is economically dependent on a potential employer for work (e.g., FLSA employee).

Federal and State Issue

The determination of whether a worker is an employee or independent contractor is both a federal and state issue. The DOL views misclassification as denying access to critical benefits and protections to which employees are entitled by law. Employee misclassification also reduces taxes paid to federal and state governments and lowers contributions to state unemployment insurance and workers’ compensation funds.

New York State Guidance

According to the New York State Department of Labor, independent contractors must be free from supervision, direction, and control in the performance of their duties. They are in business for themselves, offering their services to the general public. Signs of independent contractor status include, but are not limited to, a person who has an established business, advertises in the electronic and/or print media, sets their own schedule, and pays their own expenses.

An employer-employee relationship may exist (rather than an independent contractor relationship) if the employer: (1) chooses when, where, and how workers perform services; (2) provides facilities, equipment, tools, and supplies; (3) directly supervises the services; (4) sets the hours of work; (5) requires exclusive services; (6) sets the rate of pay; (7) requires attendance at meetings and/or training sessions; (8) asks for oral or written reports; (9) reserves the right to review and approve the work product; (10) evaluates job performance; (11) requires prior permission for absences; and (12) has the right to hire and fire.

Federal Guidance

The new federal guidance describes two “core factors” that are most probative to this question: (1) the nature and degree of control over the work; and (2) the worker’s opportunity for profit or loss based on initiative and/or investment. Further, the test identifies three other factors that serve as additional guidelines in the analysis: (3) the amount of skill required for the work; (4) the degree of permanence of the working relationship between the worker and the potential employer; and (5) whether the work is part of an integrated unit of production.

  1. Nature and Degree of Control Over the Work
    • Whether the worker exercises substantial control over key aspects of the performance of the work (e.g., setting their schedule, selecting certain projects, working with little or no supervision, and performing work for others). The DOL states that requiring a worker to comply with health and safety standards, specific legal mandates, contractually agreed-upon deadlines, and insurance policies does not constitute the type of control under this factor.

  2. Worker’s Opportunity for Profit/Loss
    • Whether the worker has an opportunity for profit or loss based on their initiative (e.g., managerial skill and business judgment) or their investment (e.g., managing investments in, or capital expenditure on, equipment, materials, or helpers).

  3. Amount of Skill Required for the Work
    • Whether the work requires specialized skill or training that the employer does not provide.

  4. Degree of Permanence of the Working Relationship Between the Worker and Employer
    • Whether the duration of the work relationship is definite or sporadic. It should be noted that seasonal work does not necessarily show independent contractor status.

  5. Part of an Integrated Unit of Production
    • Whether the work is an element of the employer’s integrated production process for a good or service (e.g., if the work is analogous to a production line).

These factors are not exhaustive, and no single factor is dispositive. However, the DOL stated that if the core factors point toward the same classification (whether the worker is an employee or independent contractor), then the weight of those factors will most likely outweigh the additional factors.

The final rule was published in the Federal Register on January 7, 2021 and the effective date of the final rule is March 8, 2021. However, the Biden administration does not favor this rule and it is possible that they will delay its implementation. The Biden campaign’s labor platform included a commitment to restore the Obama administration’s aggressive wage-hour misclassification agenda. This would create a more rigid test for qualifying workers as independent contractors than this rule.

What if a Business Does Not Comply?

If a business is discovered to have improperly treated an employee as an independent contractor, the business will be held accountable for employment taxes for that worker, as well as unemployment insurance and workers’ compensation contributions, with associated fines and penalties.

If you have any questions regarding the classification of employees versus independent contractors, please contact us.

Learn more about this issue here.

Thank you to Daniel Axelrod for his research and writing assistance with this article.

[1] This rule is different from the prior factors used to distinguish employees from independent contractors. The prior factors were: (1) the nature and degree of the potential employer’s control; (2) the permanency of the worker’s relationship with the potential employer; (3) the amount of the worker’s investment in facilities, equipment, or helpers; (4) the amount of skill, imitative, judgment, or foresight required for the worker’s services; (5) the worker’s opportunities for profit or loss; and (6) the extent of integration of the worker’s services into the potential employer’s business.