DoL Finalizes Independent Contractor Classification Rule

The Department of Labor announced a new rule it says will make it easier to classify workers. But will the rule ever actually go into effect?

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Last week the U.S. Department of Labor announced a final rule for clarifying whether a worker is an independent contractor or an employee. The rule, which comes at the end of a long legal process, is meant to simplify and streamline the procedure of classifying workers.

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“This rule brings long-needed clarity for American workers and employers,” said U.S. Secretary of Labor Eugene Scalia. “Sharpening the test to determine who is an independent contractor under the Fair Labor Standards Act makes it easier to identify employees covered by the Act, while recognizing and respecting the entrepreneurial spirit of workers who choose to pursue the freedom associated with being an independent contractor.”

The question of whether a worker is an employee or an independent contractor has grown increasingly important over the last few years. The answer carries ramifications not just for the construction industry, which relies on efficient and productive relationships between contractors and independent subcontractors, but also for rapidly growing gig-economy industries like ride-sharing and food delivery services. Those workforces are made up almost entirely of independent contractors.

The final rule provides context for an “economic realities test” used to clarify a worker’s status. This test is based around five main factors to determine whether a worker is in business for him or herself, or if they are economically dependent on their employer for work.

Two “core factors” are meant to provide the most weight in the determination. They are:

  • The nature and control of one’s work;
  • The worker’s opportunity for profit or loss based on initiative and/or investment.

The rule also provides three other factors as “additional guideposts” in the determination, especially if the two core factors are inconclusive. Those factors are:

  • The amount of skill required for the work;
  • The degree of permanence of the working relationship between the worker and the potential employer;
  • Whether the work is part of an integrated unit of production.

The rule also provides six examples of those factors being applied, and clarifies that “the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.”

According to DoL Wage and Hour Division Administrator Cheryl Stanton, “Streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility. The rule we announced today continues our work to simplify the compliance landscape for businesses and to improve conditions for workers. The real-life examples included in the rule provide even greater clarity for the workforce.”

The final rule was published in the Federal Registrar on January 7 and is scheduled to go into effect March 8. However, it is widely expected the rule will be opposed by the incoming Biden administration, due to concerns that it gives employers too much power and enables corporation to take advantage of worker classification.