Employee or Freelancer? New Rules for Independent Contractors

Is a person who works for your business financially dependent on you, or can they potentially independently profit based on their skill set? Will they be part of your company indefinitely? Do they perform a central, daily, integral role? Do you dictate when, where and how they work? Do you limit their ability to work for others? Can the person apply what they do to other endeavors, widening their market reach and leading to other revenue streams?

Small businesses and other employers will need ask themselves this set of questions and consider the “totality of the circumstances” in determining whether to classify people who work for them as employees or independent contractors, in a rule change published by the U.S. Department of Labor’s Wage and Hour Division on January 10, set to take effect March 11.

The new rule addresses classifications under the Fair Labor Standards Act, first enacted in 1938. The Department of Labor’s executive summary of the rule states that its approach goes back to the future, returning such determinations to the “economic reality” test applied by the department since the 1940s and widely upheld with “slight variations” by various courts of appeals.

“In assessing economic independence, courts and the Department have historically conducted a totality-of-the-circumstances analysis, considering multiple factors to determine whether a worker is an employee or an independent contractor, with no factor or factors having predetermined weight,” the summary reads. “These factors generally include the opportunity for profit or less, investment, permanency, control, whether the work is an integral part of the employer’s business, and skill and initiative.”

The new rule supplants the rule published on January 7, 2021, that the department now says “marked a departure from the consistent, longstanding adoption and application of the economic reality test by courts and the Department of how to determine whether a worker is an employee or an independent contractor under the FLSA.”  See: https://www.bellas-wachowski.com/new-guidance-for-independent-contractor-classifications-may-broa.html

That iteration of the rule identified the nature and degree of control over the work, and the worker’s opportunity for profit or loss, as “core factors” that should carry greater work in making the determination, while the amount of skill required, the degree of permanence in the working relationship, and whether the work was part of an integrated unit of production, were non-core factors unlikely to outweigh the other two. The 2021 rule also somewhat changed the definitions and scope of some of those factors.

Ultimately, DOL felt that the departures from precedent would be both confusing to employers—potentially resulting in worker misclassifications—and could potentially lead to years of appellate litigation, with a murky future in terms of how widely courts would be willing to adopt its analysis.

The final rule thus returns the question to the “totality of the circumstances” analysis, with no one factor given a predetermined weight over the others, which the department believes will provide more consistent guidance and protect employees from misclassification—while preserving the “important role in our economy” played by independent contractors.

If your business uses independent contractors, your contracts with the contractors should be reviewed so that your business is not faced with a reclassification of the contractors.