Independent Contractor or Employee? New Rule Coming Soon

The Department of Labor (DOL or Department) issued a final rule on January 6, 2021, clarifying who is an independent contractor versus an employee under the Fair Labor Standards Act (FLSA or Act). Why does it matter, anyway? It matters because employers are required to pay their employees at least the federal minimum wage ($7.25) for every hour worked and overtime pay for every hour worked over 40 in a workweek. Employers are also required to keep certain records for their employees. However, if you’re an independent contractor – employers do not have to do any of the above.

The test for determining whether you are an independent contractor, according to the FLSA, is whether you are dependent on your employer for work. If the answer is yes, you are an employee. If the answer is no, then you may be an independent contractor.

To help clarify whether you are an independent contractor, the DOL has issued the following distinct factors to consider:

  • Factor 1 (also known as a “core factor”) – The nature and degree of control over the work.
  • Factor 2 (also known as a “core factor”) – The worker’s opportunity for profit or loss based on initiative and/or investment.
  • Factor 3 – The amount of skill required for the work.
  • Factor 4 – The degree and permanence of the working relationship between the worker and the potential employer.
  • Factor 5 – Whether the work is part of an integrated unit of production.

Although no single factor is dispositive, the inquiry focuses on “two core factors” that are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself. Try this scenario out to test your understanding:

Scenario: A housekeeper works for a ski resort every winter. At the end of each winter, he stops working for the ski resort because the resort shuts down. At the beginning of each of the past several winters, the housekeeper returned to his prior position at the ski resort without formally applying or interviewing.

Employee or Independent Contractor?

Application of Factors: The housekeeper has a long-term and indefinite work relationship with the ski resort under the permanence factor (Factor 4), which weighs in favor of classification as an employee. That his periods of working for the ski resort end at the end of each winter is a result of the seasonal nature of the ski industry and is thus not indicative of a sporadic relationship. The fact that the housekeeper returns to his prior position each new season indicates that his relationship with the ski resort does not end and is indefinite. Further, it is likely that the ski resort controls the nature of the work (Factor 1 – core factor) and the hours worked thereby limiting the opportunity for initiative and investment for profit (Factor 2 – core factor). The three factors suggest that the housekeeper is an employee of the ski resort and not an independent contractor. If you guessed EMPLOYEE, you are right! But remember, additional factors may be relevant in determining whether you are an employee or independent contractor for purposes of the FLSA.

Call our office if you have any questions about your employment status.