Independent contractor or employee? That has long been the question under various federal and state laws.

Why such a buzz about this issue?

Well, properly classifying workers is critical for many reasons, not least of which is that only employees fall under the protection of certain federal laws and entitlements. And for employers, misclassification can get employers into a whole lot of trouble. (Think: high financial penalties, which I spell out for you below.)

Independent contractors don’t get meal breaks.

Independent contractors don’t have to be paid minimum wage or overtime, and are generally not subject to wage and hour laws like the Fair Labor Standards Act (FLSA).

Employers don’t need to withhold taxes from payments for independent contractors.

In addition, independent contractors do not benefit from the protections of federal employment laws like Title VII of the Civil Rights Act of 1964, the Americans With Disabilities Act, the Age Discrimination in Employment Act, or the Family Medical Leave Act, to name just a few.

For these reasons and more, the presumption is that a worker is an employee. Unless the person is not.

Anyway, today, the U.S. Department of Labor (USDOL) announced a final rule clarifying the standard for employee versus independent contractor status under the FLSA.

The USDOL’s stated its goal in clarifying the test is to make it easier to identify employees covered by the FLSA, “while recognizing and respecting the entrepreneurial spirit of workers who choose to pursue the freedoms associated with being an independent contractor.”

I like the sentiment. I’m here for it.

Wait, what is this “Final Rule” Exactly?

The Final Rule includes the following clarifications:

  • Reaffirms the “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 (employee).
  • Identifies and explains two “core factors” that are most indicative of whether a worker is economically dependent on someone else’s business or is in business for him or herself:
    • The nature and degree of control over the work. The “old” rule considers this factor pivotal as well.
    • The worker’s opportunity for profit or loss based on initiative and/or investment.
  • Identifies three other factors that may serve as additional guidance:
    • 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.
  • Provides six fact-specific examples applying the factors.

The rule will take effect 60 days after publication in the Federal Register, on March 8, 2021, which means the incoming Biden administration may withdraw it.

Employer Takeaways

State laws, like in California and New York, may be more restrictive. Employers need to know if they are in a state with classification rules vary from federal laws.

Stay tuned, and we’ll see if USDOL implements this new final rule or whether President Biden withdraws it. In any event, this is a good time (new year, new start) for employers to examine employment classifications and consider these factors. Penalties for misclassification can result in a host of legal consequences, depending on the infraction, including owing back taxes, FICA, payroll taxes, Social Security, Medicare, sick leave, interest, liquidated damages, and criminal and civil penalties.