The U.S. Department of Labor announced a final rule for employee versus independent contractor status
- January 7, 2021
Businesses have historically preferred to classify individuals working for them as “Independent Contractors” rather than employees for the purpose of avoiding employee expenses including: FICA, overtime, health insurance, retirement, unemployment insurance, workers compensation premiums, etc. The Department of Labor announced a final rule that clarifies the standard for an employee vs. an independent contractor as it pertains to the Fair Labor Standards Act (FLSA). This will go into effect on March 8, 2021. An independent contractor is defined as a worker that is not dependent on any one person, or business yet there are contractors that work exclusively for one company.
What does this mean to your business?
The ruling will help in clarifying American workers and their relationship to their employer by making it easier to identify employees covered by the act. This rule will promote certainty for stakeholders, reduce litigation, encourage innovation and improve job satisfaction in the economy. Cheryl Stanton, a Wage and Hour Division Administrator, says, “The rule continues our work to simplify the compliance landscape for businesses and to improve conditions for workers. The real-life examples included in the rule provide even greater clarity for the workforce.”
With so many companies going remote and/or simply trying to stay in business, many are being creative in how they are hiring and maintaining staff and it is important to understand how this rule may affect your company. New York Businesses have been hiring independent contractors for years as the costs for business owners to maintain employees are significantly higher than the costs associated with hiring independent contractors. Independent contractors who want more flexibility or have a client base prefer such a set-up as well, however, independent contractors have neither protection nor entitlement when it comes to job security.
The ruling includes:
- Reaffirms an “economic reality” test to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).
- Identifies and explains two “core factors” that are 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 control over the work.
- The worker’s opportunity for profit or loss based on initiative and/or investment.
- Identifies three other factors that 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 worker and the potential employer.
- Whether the work is part of an integrated unit of production.
- 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 will take effect 60 days after publication on the Federal Register, on March 8, 2021.
Misclassifying employees as independent contractors is a serious issue that could cost your company money. Learn the penalties you need to avoid, and have your questions answered by contacting us online, or by calling us at 845-298-2000. Stenger, Diamond & Glass, LLP (SDG Law) is one of the largest law firms in Dutchess County, we have the available resources to handle any category of legal dispute. With 12 experienced attorneys, we represent a wide array of individuals, businesses, municipalities and institutional clients throughout the area.