As we previously reported, this past September the U.S. Department of Labor (DOL) proposed a new rule that would create a uniform approach to the way companies classify workers as independent contractors or employees under the Fair Labor Standards Act (FLSA). More specifically, in the proposed rule, the DOL adopted the “economic reality” test, which uses five main factors to determine whether workers are in business for themselves (as an independent contractor), or whether they are economically dependent on a potential employer (as an employee).

On January 6, the DOL announced the final rule (anticipated to be published on January 7), which further clarifies these new standards. The final rule reaffirms the use of the “economic reality test” to distinguish between independent contractors and employees and cements the previous proposal to place a greater probative weight on two of the five factors considered in a traditional “economic reality” analysis. The remaining three factors will serve as guideposts, in the event that the two core factors lead to differing classification determinations.

Importantly, the final rule provides additional guidance with respect to the two core factors, which are the nature and degree of the worker’s control over the work (the “control factor”) and the worker’s opportunity for profit or loss (the “profit and loss factor”). First, the final text explains that an analysis of the control factor must examine both the control exerted by the individual worker as well as by the potential employer. Second, the DOL explains that an individual worker’s “meaningful capital investments” and a worker’s initiative (such as managerial skill and business acumen or judgment) should be considered as part of the profit and loss factor, whereas a comparison of the relative investments of the individual worker to the potential employer should not.

Finally, the final rule reiterates that this test should maintain a focus on the actual practices of both parties, as opposed to any theoretical or contractual agreements.

The effective date of the final rule is March 8, 2021.

The DOL’s final rule has important consequences for employers when classifying their workers under FLSA. If you have any questions or concerns about the new rule, or how it affects your company, Reed Smith’s experienced Labor & Employment Group is ready to speak with you.