The U.S. Department of Labor announced a final rule to clarify independent contractor status under the fair labor standards act. In this January 2021 ruling, the department is setting the standard to determine whether a person is an employee or an independent contractor. Attention has been given the employee vs independent contractor issue over the years as some would argue individuals (independent contractors) are seeking entrepreneurial freedom. Others might say employers are trying to avoid paying benefits and taxes to individuals calling an employee an independent contractor.
The Trump administration had been putting finishing touches on the rule in the final days of its tenure. However, will it remain intact during the Biden administration? The ruling is contentious because it’s likely to have an impact on labor relations, pay scales and benefits for workers.
CLARIFYING AS AN EMPLOYEE OR INDEPENDENT CONTRACTOR
The Final Rule includes clarifications in several areas:
- It reasserts an “economic reality” test to decide whether an individual is in business for themselves (as in the case of an independent contractor). Or, is the individual economically dependent on the potential employer (such as a Fair Labor Standards Act (FSLA) employee)
- It recognizes and clarifies two “core factors” that are most pertinent to the question of classification:
- The nature and degree of control over the work.
- The worker’s opportunity for profit or loss based on initiative and/or investment.
Under the Final Rule, these two factors are the main pillars of thought. If two of the factors are met, then the individual will be classified as either an employee or independent contractor. There are three other factors that may serve as guideposts in trying to determine a classification, especially when the two core factors are not met:
- 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.
WHAT HAPPENS NOW?
It is no secret the Biden administration had earmarked the Final Rule as one it would likely freeze when he took office. The rule may also face legal challenges from labor unions, so will the law take effect March 8, 2021? That remains to be seen, however, it does provide some guidance in a complex area.
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