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Department of Labor Issues New Rule for Worker Classification

January 18, 2021

Cleveland, Ohio

The United States Department of Labor (“DOL”) eased the classification process by clarifying the factors that determine when a worker is considered an independent contractor versus an employee under the Fair Labor Standards Act (“FLSA”). On January 6, 2021, the DOL issued this Final Rule which is set to take effect on March 8, 2021. However, the incoming Biden administration may revise or rescind the rule before the effective date.

The DOL rule affirms and emphasizes the “economic reality test” when classifying a worker for FLSA purposes. The rule examines that a worker who labors for himself is an independent contractor; whereas, a worker that is economically dependent on a business is an employee. Applying the rule requires balancing five factors, two of which are critical while the other three are considered relevant. 

Five factors are examined in determining whether a worker is an independent contractor or an employee for FLSA purposes. Critically, the two core factors controlling the analysis are the nature and degree of control over the work and the worker’s opportunity for profit and loss based on initiative and investment. The three relevant factors balance the skill required, degree of worker’s permanence, and whether the work is part of an integrated unit of production. Ultimately, the new DOL rule emphasizes the practical aspects of work over the theoretically or conceptually possible outcomes from their work. Also helpful is the Final Rule at §795.115 which provides six real-life examples of how the new analysis works.

Broadly, the purpose of the DOL rule is to add firmness when classifying workers for FLSA purposes. While this rule may make classification easier, the rule’s viability hinges on the incoming administration, which may rescind or revise the DOL’s Final Rule. Therefore, relying on the rule is premature and employers must wait and see how the rule is treated. 

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