Final Rule to Provide Clarification for Employee Versus Independent Contractor

The U.S. Department of Labor (DOL) announced a final rule Wednesday, clarifying the standard for what constitutes an employee versus an independent contractor under the Fair Labor Standards Act (FLSA). U.S. Secretary of Labor Eugene Scalia said the rule brings “long-needed clarity for American workers and employers,” by helping employers to identify which employees are covered by FLSA. As a federal law, FLSA establishes such things as minimum wage, eligibility for overtime pay and recordkeeping requirements.

Associated Builders and Contractors vice president of regulatory, labor and state affairs Ben Brubeck called the revisions in the final rule “a win for small businesses, free enterprise and economic growth” as the U.S. “looks to rebuild and recover.”

“We are pleased the final rule clarifies the DOL’s interpretation of independent contractor status under the Fair Labor Standards Act and promotes certainty for employers, independent contractors and employees. Independent contractors are an essential lifeline to the construction industry—they provide specialized skills, entrepreneurial opportunities and stability during fluctuations of work common to construction,” he said. “Bottom line: DOL’s final rule will promote economic growth in multiple industries, including construction, by providing greater clarity to industry employers as to the proper classification of independent contractors and employees under the FLSA.”

Officials for the National Association of Home Builders (NAHB) immediately praised the move, suggesting it will help businesses to clarify definitions among “often-conflicting federal tests.” Officials say a sharper set of definitions will provide better clarity for specialty trade contractors and home builders, while urging the incoming Biden administration to allow the rule to take effect.

The rule reaffirms an “economic reality” test designed to determine whether an individual is an independent contractor or is “economically dependent on a potential employer for work,” constituting designation as an employee under FLSA. Two “core factors” are explained, including the nature and degree of control a worker has over their work and opportunities for profit or loss based on such things as worker initiative and investment. In cases when those two core factors fail to coalesce, the final rule points to three other factors for analysis, including the degree of skill required to perform work, the degree of permanence of working relationships between worker and potential employers and whether or not work is “part of an integrated unit of production.”

The rule further clarifies that, “The actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible,” also providing six specific examples for applying 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 Cheryl Stanton, DOL Wage and Hour Division administrator. “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 took effect 60 days after publication on the Federal Register, which occurred Thursday.