DOL Issues Final FLSA Worker Classification Rule

The Department of Labor announced a final rule on independent contractors in January. The new ruling is expected to make it more difficult to classify workers as independent contractors.

It introduces a new standard using a totality-of-the-circumstances analysis of the economic reality test to determine if the worker is in business for themselves.

Fair Labor Standards Act (FLSA)

There are two types of employees – “exempt” and “nonexempt.” An exempt employee is not entitled to overtime pay and other protections according to the Fair Labor Standards Act (FLSA). Nonexempt employees must be paid minimum wage and overtime, provided breaks, and protected by the rules of the FLSA.

Under the existing rules, Nonexempt employees are entitled to overtime pay and other benefits protected by the FLSA. Exempt employees are not.

Some jobs are classified as exempt by definition. For example, “outside sales” employees are exempt (“inside sales” employees are nonexempt). Some states, like California, have their own lists for exempt and nonexempt employees. For most employees, however, whether they are exempt or nonexempt depends on:

(a) how much they are paid 

(b) how they are paid

(c) what kind of work they do. 

The New Standard

Although the new rule introduces six factors that determine whether a worker is an independent contractor, it sets the totality-of-the-circumstances analysis of the economic reality test as the deciding issue rather than using “core factors.” The DOL states that “economic dependence is the ultimate inquiry, meaning that a worker is an independent contractor as opposed to an employee under the [FLSA] if the worker is, as a matter of economic reality, in business for themself.

The six factors that guide the worker’s relationship with an employer:

  1. Opportunity for profit or loss a worker might have
  2. Investments in the equipment made by the worker
  3. The degree of permanence of the work relationship
  4. The degree of control an employer has over the work
  5. Whether the work is essential to the employer’s business
  6. The worker’s skill and initiative

Who Is Most Affected

The DOL states that this new rule is not targeting any specific labor market. It is anticipated the businesses at risk include driver businesses like Uber and Lyft, as well as food delivery companies including Grub Hub and Door Dash.

Both groups have released opinions that it will not affect their current operations. The courts will determine the true impact.