On January 6, 2021, the U.S. Department of Labor (“DOL”) finalized a proposed rule clarifying the distinction between employees and independent contractors. The final rule was published in the Federal Register on January 7, 2021. It is slated to take effect on March 8, 2021.
As we discussed on September 22, 2020, this new rule reaffirms and streamlines the so-called “economic realities” test to determine whether an individual is an independent contractor or an employee, winnowing the test down to a slim 5-factor approach. On its face, the rule appears to make it easier for employers to classify their workers as independent contractors.
But employers should avoid relying on this new rule to reclassify employees as independent contractors:
- First, it remains to be seen whether the incoming Biden administration will permit the final rule to take effect. The Biden administration is expected to take a much more aggressive position on wage-and-hour and misclassification issues, and is likely to engage in administrative or legislative maneuvering to put the brakes on the final implementation of the rule in March 2021.
- Second, employers should remember that the rule only applies to the Fair Labor Standards Act (FLSA), which governs federal minimum wage and overtime requirements. Many state and local laws apply stricter tests to misclassification matters. In other words, a worker who may not have a wage and hour claim under FLSA might still have a wage and hour claim under state or local law, if he or she does not meet the higher state/local test for independent contractor classification.
- Third, courts may not necessarily follow the DOL’s interpretation. Though the rule will almost certainly be persuasive authority, courts are not obligated to follow it and may instead choose to follow the body of case law interpreting independent contractor status under the FLSA.
Business owners and human resources professionals should take this opportunity to analyze existing independent contractor arrangements and contract templates in light of the new rule. They should consider whether the arrangement or contract meets or fails the five factors test, and in appropriate cases, consider alternatives for reclassifying such workers as employees or shoring up the contractor classification. Employers should also continue to follow legislative and political developments for changes once Biden takes office.
Experienced employment counsel can help employers by analyzing these relationships, educating employees of their obligations under applicable law, and working with employers and their teams to craft and implement strategies to address areas of risk.
If you have any questions about this article, or would like advice on addressing your workers’ employee/independent contractor status, please contact us at HRlawyers@wfpclaw.com or visit us at www.wfpclaw.com.