Independent Contractor Status Under the Fair Labor Standards Act, 29 CFR Parts 780, 788, and 795, 86 Fed. Reg. 1168 (Jan. 7, 2021); News Release: U.S. Department of Labor Announces Final Rule to Clarify Independent Contractor Status Under the Fair Labor Standards Act (Jan. 6, 2021)
The DOL’s Wage and Hour Division (WHD) has finalized regulations for determining whether a worker is an independent contractor for purposes of the Fair Labor Standards Act (FLSA). Among other things, the FLSA governs minimum wage and overtime requirements that apply to employees but not independent contractors. The final regulations generally retain the provisions of the proposed version (see our Checkpoint article), while adding provisions intended to further clarify the rules.
As under the proposal, status as an employee or independent contractor is determined by looking to the “economic reality” of the relationship and asking whether workers are economically dependent on a putative employer for work, as distinguished from being in business for themselves. The primary focus remains on two “core” factors—the nature and degree of a worker’s control over the work, and the worker’s opportunity for profit or loss based on the worker’s initiative, investment, or both. The regulations list other factors that may be considered (namely the required skill level for the work, the permanence of the working relationship, and whether the work is integrated with the putative employer’s production process) but note that these factors are unlikely to outweigh the “probative value” of the two core factors when both core factors point to the same classification. A new provision specifies that additional factors beyond those listed may be considered only if they indicate whether individuals are in business for themselves (as opposed to being economically dependent on the potential employer). And a new subsection provides examples illustrating the economic reality analysis as applied to various situations, including a tractor-trailer owner/operator performing services for a logistics company; an individual accepting work assignments from a company operating an app to link customers with service providers; a residential construction worker who separately operates a food truck on weekends; a seasonal ski resort worker who returns each winter; a part-time newspaper editor who coordinates with full-time employees but works from home; and a freelance journalist.
The regulations state that they are effective March 8, 2021, but a White House memorandum asks agency heads to consider postponing the effective date of regulations that have been published but are not yet effective (such as these) and possibly allow an additional comment period.
EBIA Comment: Interested parties should keep an eye out for further developments in light of the White House memorandum. Keep in mind that the standards for classifying workers as employees or independent contractors differ for different purposes. Although the FLSA governs some important aspects of the employer-employee relationship, most employee benefit plan rules determine employee status under ERISA or the Code, often in conjunction with the common-law standard. (One exception is the requirement to furnish Exchange notices to employees, which uses the FLSA definition.) Nevertheless, these regulations are a good reminder that proper worker classification under the applicable standard is important, particularly for purposes of retirement plan rules, favorable tax treatment for various health and welfare benefits, nondiscrimination rules, and the ACA’s employer shared responsibility provisions. For more information, see EBIA’s Health Care Reform manual at Section XXI.E.3.a (“Exchange Notice: Who Is an Employee for FLSA Purposes?”). See also EBIA’s ERISA Compliance manual at Section IX.I (“Eligibility Issues Involving Independent Contractors, Leased Employees, and Others”); EBIA’s Cafeteria Plans manual at Section IX (“Who Can Participate in a Cafeteria Plan?”); EBIA’s Self-Insured Health Plans manual at Section XIV.C (“Which Employees and Other Workers Will Be Allowed to Participate?”); and EBIA’s 401(k) Plans manual at Section VII.B (“Eligibility Condition #1: Participation Limited to Common-Law Employees, Partners and Sole Proprietors, Some Leased and Statutory Employees”).
Contributing Editors: EBIA Staff.