Employee or Independent Contractor? DOL Final Rule Provides 5-Factor Assessment

January 19, 2021

 

employee or contractor

The Department of Labor (DOL) has issued a final rule on the Independent Contractor Status under the Fair Labor Standards Act. The final rule is part of the DOL’s continued efforts to help employers make the status distinction: employee or independent contractor. While there’s talk of more change to come with the shift to the Biden administration, the rule currently takes effect on March 8, 2021.

“This rule brings long-needed clarity for American workers and employers,” said U.S. Secretary of Labor Eugene Scalia. “Sharpening the test to determine who is an independent contractor under the Fair Labor Standards Act makes it easier to identify employees covered by the Act, while recognizing and respecting the entrepreneurial spirit of workers who choose to pursue the freedom associated with being an independent contractor.”

The rule stands behind the use of the “economic reality” test to determine whether a worker is an employee or independent contractor. To assist with that determination, the rule contains 5 independent factors for employers to use, highlighting the first 2 as “core factors,” in their assessment and determination. The final rule also acknowledges that, if a worker is categorized in the same manner after assessment/core factors 1 and 2, “there is a substantial likelihood that that classification is appropriate.” 

Assessment/Core Factor 1

To what degree do you control the manner in which the worker’s work is to be performed?

It’s important for employers not to confuse control in this instance with legal obligations. Whether you require a worker to follow certain standards or carry a specific type of insurance can’t be used to determine the worker’s status. The “manner in which work is performed” pertains to scheduling, workload, and exclusivity. In general, independent contractors have more autonomy. If you set the worker’s schedule or their workload, he or she is more likely to be an employee. According to the rule, an employee is, “as a matter of economic reality, […] economically dependent on that employer for work.” So, if the worker performs services for other businesses or individuals, they are more likely to qualify as an independent contractor.

Assessment/Core Factor 2

What is the worker’s opportunity for profit or loss?

If, aside from working faster, more efficiently, or for more hours, a worker has no control over increases or decreases in earnings, he or she is more likely to be an employee. Conversely, independent contractors can use managerial skill or other initiatives and investments as a means for affecting their profit or loss.

Assessment Factor 3

Does the service rendered require a special skill?

If the worker performs duties that do not require specialized skills, or the worker obtained training from you to perform his or her duties, he or she is more likely to be an employee. If the worker performs a service that requires specialized training or skill that you do not provide, he or she is more likely to be an independent contractor. 

Assessment Factor 4

What is the degree of permanency of the working relationship?

If your relationship with the worker is “indefinite in duration or continuous,” he or she is more likely to be an employee; however, special consideration should be taken to correctly differentiate seasonal employees from independent contractors. Independent contractors may be characterized by work in “regularly occurring fixed periods.” If your relationship with the worker is “definite in duration or sporadic,” he or she is more likely to be an independent contractor. 

Assessment Factor 5

Is the service rendered an integral part of your business?

If the service the worker performs is an integral part of what you do and constitutes part of the production of one of your goods or services, he or she is more likely to be an employee. If, on the other hand, the worker’s service “is segregable from […] [your] production process,” he or she is more likely to be an independent contractor.

The DOL’s rule states, “The actual practice of the parties involved is more relevant than what may be contractually or theoretically possible.” It’s important for employers to consider the true nature of the working relationship and the work performed when making an assessment, as the potential nature, based on an ideal or contractual situation, could differ significantly. The final rule also acknowledges that, if there are questions outside the realm of a worker’s economic dependence, other factors may be relevant in your assessment. 

Commonwealth Payroll & HR is here to help.

At Commonwealth, we help employers like you navigate legislative changes and regulatory updates. The DOL’s final rule may impact your pay scales, your worker’s benefits, or the way you withhold taxes. We are committed to keeping clients on the right side of planning and compliance. Contact us today to talk about your strategy.

 

*The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. This article contains links to other third-party websites provided only for the convenience of the reader.

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