The US Department of Labor (DOL) published a final rule earlier this month clarifying how employers can determine which of their employees is an independent contractor under the Fair Labor Standards Act (FLSA). Since the final rule isn’t scheduled to take effect until March 8, 2021, businesses still have time to prepare for the potential complications it could create for categorizing their workers.
Luckily, it doesn’t differ much from the proposed rule broadcast in September of 2020. Let’s review the final rule and what you can expect over the next several months of 2021.
Independent Contractor Test’s New Final Rule
As previously mentioned, the final rule does not diverge from the proposed independent contractor rule, and therefore upholds the “economic reality” test in just the same way. This test determines categorization between employee and independent contractor based on two “core factors”: the nature and degree of control your employee has over their work and the opportunity for profit or loss based on their initiative, investment or both.
In addition, three other factors are considered to ensure fair results:
- the amount of skill or judgement required for your employee’s work;
- the degree of permanence around your working relationship with the employee; and
- whether your employee’s work is integrated as a critical role within your business’s production overall.
To be clear, these factors should hold less weight in the decision-making process than the core factors overall. The final rule emphasizes that, the actual practice of your workers is more relevant than what may be contractually or theoretically possible.
State Law Complications for Determining Independent Contractors
The final rule applies only to DOL's interpretation of the FLSA's independent contractor classification, meaning that certain state and local laws that touch on the issue could still apply. That includes California's Assembly Bill No. 5, or AB-5, which expands the number of workers that can be classified as employees.
However, the final rule is focused on the jurisdiction of DOL, and is therefore not binding on state governments. According to JD Supra, it applies only to the FLSA and, therefore, will have no impact on any state wage and hour laws that have not adopted the FLSA themselves.
What Does the New Presidential Administration Mean for this Final Rule?
All that said, with the incoming Biden administration about to take office, it is unlikely that the final rule will have a chance to go into effect. President-elect Biden and his team have indicated that they will likely halt or delay regulations issued by the Trump administration if they have not yet taken effect come Inauguration Day.
In addition, with the Democratic Party taking control of the US Senate, it is equally possible that the final rule will be overridden under the Congressional Review Act. In other words, employers should wait and see if the new administration makes any major changes to this “economic realities” test before putting it into practice.
Ease Your Wage and Hour Compliance
The issue of whether an employee qualifies as an independent contractor or not will remain a subject of debate and litigation for a long time. As FLSA and state wage and hour laws fluctuate, your business will be expected to review how your workers are classified on an ongoing basis.
Employment law is complicated, but EPAY Systems can help make it easier. Our advanced Human Capital Management (HCM) software is designed with built-in safeguards to help employers like you maintain labor compliance. Our customers even have access to workplace law updates via our compliance portal and HR Consulting Services directly. No matter what HR hurtle comes up, you’ll have a confident team of experts on standby to back you up.
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