With no clear guidance and different factors being given different weight by different courts, employers have struggled for years with whether workers can be properly classified as independent contractors, rather than employees, under the federal Fair Labor Standards Act (FLSA). Now, the Department of Labor has issued a new rule making clear what factors should be applied and how they should be weighted. The ultimate focus is on whether a worker is economically dependent on the putative employer for work.

The FLSA does not define the term “independent contractor,” nor does it provide bright-line tests to make this determination. Consequently, over the years, federal courts in different jurisdictions developed various multi-factor tests to evaluate misclassification claims, frequently diverging on the factors, and the application of those factors, to each case.

The new DOL rule has brought some much needed clarity and uniformity on this issue, articulating a 5-factor “economic realities” test to be applied by the DOL, and relied upon by courts, employers, and employees, in evaluating the independent contractor status. The new test, set to go into effect on March 8, 2021, focuses primarily on two “core” factors to analyze the worker’s relationship to the hiring entity: (1) “the nature and degree of the worker’s control over the work” and (2) “the worker’s opportunity for profit or loss based on initiative and/or investment.” If both factors point toward the same classification, the DOL says there would be “substantial likelihood” that that would be the worker’s accurate classification. The other three factors are designed to serve as guideposts in the analysis. An official copy of the DOL’s rule can be viewed here.

Below is a brief discussion of each factor.

The “Core” Factors:

• The Nature and Degree of Control Over the Work

This factor relates to the worker’s control over key aspects of the performance of the work. Relevant examples include the worker’s ability to set his or her own schedule, select his or her projects, and work for others while the work is ongoing. The DOL clarifies that a company’s requirement that a worker comply with certain legal obligations, such as health and safety or quality control standards, would not require classifying a worker as an employee instead of an independent contractor.

• The Individual’s Opportunity for Profit or Loss

With this factor, the DOL is focused on the individual’s ability to earn profits or incur losses by exercising his or her own initiative (e.g., managerial skill or business judgment) or managing his or her investment in the work. Thus, to the extent the individual is unable to affect his or her earnings from such initiative or management, he or she is less likely to be classified an independent contractor.

The Other Factors:

• The Amount of Skill Required for the Work

If the work requires specialized training or skill, the individual is more likely to be classified an independent contractor. Conversely, if the worker depends upon the hiring entity to equip him or her with skills or training necessary for the job, under the Rule, he or she is more likely to be classified an employee.

• The Degree of Permanence of the Working Relationship Between the Individual and the Potential Employer

Under this factor, a worker is more likely to be an independent contractor if the work at issue is for a defined period (e.g., seasonal work or work occurring on a regular schedule). If the individual has a work relationship that is designed as indefinite, he or she is more likely to be an employee.

• Whether the Work is Part of an Integrated Unit of Production

If the work at issue is part of an integrated production process for goods or services, this factor weighs in favor of the individual being an employee. However, if the work can be segregated from the production process, the individual will be more likely to be an independent contractor.

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Ultimately, the DOL reminds employers that “the actual practice of the parties involved is more relevant than what may be contractually or theoretically possible.” Accordingly, each worker’s classification must be evaluated in light of the actual practices employed by the hiring entity.

Of note, employers are cautioned that President Biden’s administration may modify or reject the rule before it goes into effect. It is not yet clear whether the new administration will take any further action, but legal challenges are likely.

Employers are also advised that the DOL’s rule is limited to employer responsibilities under the FLSA. Other government agencies, such as the IRS, have their own multi-factor tests. And also note that some state wage laws will be stricter or use other tests. For example, in California, a person providing labor or services is presumed to be an employee, rather than an independent contractor, unless the hiring entity meets the elements of the strict “ABC Test”—a three-part test employers must meet to show, among other things, that an employee is free from its control and performs work that is outside of its “usual course of business.”