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In response to the Department of Labor’s announcement of an amendment to the Fair Labor Standards Act, lawyer Meredith Riggs Guerrero published an essay to help employers and independent contractors better understand these changes.
Read his full article below.
Ministry of Labor removes independent contractor rule from FLSA
On May 5, 2021, the United States Department of Labor (DOL) announced that it would formally withdraw the independent contractor rule that it had just put into effect just a few months ago, on March 8, 2021, in the purpose of providing a formal definition of independent contractor for the purposes of the Fair Labor Standards Act (FLSA).
Why is classification important
As employers know, determining whether to classify a worker as an independent contractor or as an employee is an important decision for a business that must be carefully considered because of the implications it has for how the worker is to be paid. . Although the FLSA minimum wage and overtime requirements do not apply to independent contractors, the FLSA requires employers to pay employees a minimum hourly wage for the time they work, plus hourly compensation. overtime for time they work in excess of 40 hours per work week, unless their job duties meet one of the statutorily defined exemptions from the FLSA overtime requirement. In addition, employers must pay payroll taxes on wages they pay employees, but not on amounts paid to independent contractors.
Define who qualifies as an “independent contractor”
The FLSA does not provide a definition of an independent contractor. However, over the years since the enactment of the FLSA, courts have developed a test to determine whether a worker qualifies as an independent contractor. Some of the factors that courts have historically focused on in making this decision include:
1. The extent to which the services rendered are an integral part of the principal’s business.
2. The permanence of the relationship.
3. The amount of the alleged contractor’s investment in plant and equipment.
4. The nature and degree of control exercised by the principal.
5. The potential for profit and loss of the alleged entrepreneur.
6. The degree of initiative, judgment or forethought in free market competition with others required for the success of the claimed independent entrepreneur.
7. The degree of organization and functioning of independent enterprises.
New rule: still to be determined
In September 2020, the DOL announced a proposed rule that, for the first time, would define through a test whether workers are employees or independent contractors within the meaning of the FLSA. The proposed change would base the classification on an “economic reality test” which would place the majority of weight on two fundamental factors in determining whether workers are economically dependent on someone else: (1) the nature and degree of control of the worker on the job; and (2) the possibility for the worker to realize profits or losses on the basis of the initiative and / or the investment of the worker. If these two key factors were not determinative, three other factors may be considered: (1) the skill level required for the job; (2) the degree of permanence of the employment relationship between the worker and the potential employer; and (3) whether the work is part of an integrated production unit.
The Independent Contractor Final Rule went into effect on March 8, 2021. However, a few days later, on March 12, 2021, the DOL issued a Notice of Proposed Settlement (NPRM) proposing to remove the rule from the independent contractor. After reviewing approximately 1,000 comments submitted in response to the NPRM, the DOL announced on May 5, 2021 that it would formally withdraw the independent contractor rule effective May 6, 2021. The DOL said it has determined that the rule is inconsistent with the purpose of the FLSA and express language of the statute, as well as years of court decisions interpreting the FLSA. The DOL also said the independent contractor rule would likely create confusion for workers and businesses who have looked to the test created by the courts for many years.
Conclusion: The test developed by the court to determine whether a worker is an independent contractor remains in place. If you have questions regarding classification or employee status, we can help.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought on your particular situation.
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