FCA legal counsel prepared a memo reviewing what signatory contractors need to know about the DOL’s recently announced rule. Read on for more.
The Department of Labor (DOL) published a Final Rule on Independent Contractor Status under the Fair Labor Standards Act, which is currently set to go into effect March 8, 2021. The rule outlines the analysis by which the DOL will consider whether a worker is an “employee,” and therefore potentially covered by the FLSA’s minimum wage or overtime laws, or an “independent contractor,” who is exempted from the FLSA and other employment laws.
Five-Factor “Economic Realities” Test
The Final Rule reaffirms the use of the five-factor “economic realities” test, but notes that two factors are “core factors” and therefore 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:
- The nature and degree of the worker’s control over the work.
- The worker’s opportunity for profit or loss based on initiative, investment, or both.
Three other factors, the DOL concludes, may serve as additional guideposts in the analysis, particularly when the two core factors do not point to the same classification. The factors are:
- The amount of skill required for the work.
- The degree of permanence of the working relationship between the individual and the potential employer.
- Whether the work is part of an integrated unit of production.
The DOL makes clear that the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible. By way of example, the DOL explains that “a business’ contractual authority to supervise or discipline an individual may be of little relevance if in practice the business never exercises such authority.”
Construction Industry Example
Finally, the DOL’s the Final rule provides six fact-specific examples applying the factors, including one example relevant to the construction industry:
An individual worker works full time performing home renovation and repair services for a residential construction company. She is also the part owner of a food truck, which she operates on weekends. In performing the construction work, the worker is paid a fixed hourly rate, and the company determines how many and which tasks she performs. Her food truck recently became very popular and has generated substantial profits for her.
In its new rule, the DOL explains that the worker is an “employee” of the residential construction company and the fact that she has a side job (i.e., owning the food truck) is irrelevant:
With regard to the construction work, the worker does not have a meaningful opportunity for profit or loss based on her exercise of initiative or investment, indicating employee status. She is unable to profit, i.e., increase her earnings, by exercising initiative or managing investments because she is paid a fixed hourly rate and the company determines the assignment of work. While she earns substantial profits through her food truck, that is a separate business from her work in the construction industry, and therefore is not relevant to the question of whether she is an employee of the construction company or in business for herself in the construction industry.
The DOL’s new rule, which is designed to make the independent contractor analysis “clearer and more consistent” will go into effect 60 days after it is published in the federal register. Time will tell whether the incoming administration will seek to invalidate or overturn the new rule.
We will continue to monitor this issue as it develops.