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Federal - Final Rule Clarifies Independent Contractor Status under the Fair Labor Standards Act

On January 6, 2021, the U.S. Department of Labor, Wage and Hour Division, announced a final rule clarifying whether an individual is an employee or an independent contractor under the Fair Labor Standards Act (FLSA) as follows:

  • The “economic reality” test was reaffirmed, which determines whether an individual is in business for themselves (independent contractor) or is economically dependent on a potential employer for work (FLSA employee). 
  • Identifies and explains two core factors to determine whether a worker is economically dependent on someone else’s business (an employee) or is in business for themselves (an independent contractor):
    • The nature and degree of control over the work; and
    • The worker’s opportunity for profit or loss based on initiative and/or investment.
    • If those two primary core factors do not point to the same classification, then the rule identifies the following additional factors to determine status:
  • The amount of skill required for the work;
  • The degree of permanence of the working relationship between the worker and the potential employer; and
  • Whether the work is part of an integrated unit of production.
  • Identifies that the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
  • Provides six fact-specific examples applying the factors.

The rule is effective March 8, 2021.