New Labor Department Rule Draws Sharper Distinction Between Employees and Independent Contractors

Denis Fitzgibbons

A six-factor “economic realities test” will guide government examiners in determining whether an employee has been misclassified as an independent contractor.

The U.S. Department of Labor has issued a new rule that re-defines how Wage and Hour Division auditors will determine whether a worker is an employee or an independent contractor.

The new rule is effective March 11.

The standards are generally viewed as raising the presumption that a worker is an employee entitled to overtime, minimum wage, and other Fair Labor Standards Act (FLSA) benefits.

Consequently, businesses that pay any workers as independent contractors bear a greater burden to show that the workers are not, in fact, employees covered by the FLSA.

The rule addresses six factors – some of which are, in our view, very subjective – that provide an “economic realities test” that is intended to guide the analysis of a worker’s relationship with an employer:

• the worker’s opportunity for profit or loss in connection with the work performed;
• the financial stake and nature of any resources a worker has invested in the work;
• the degree of permanence of the work relationship;
• the degree of control an employer has over the person’s work;
• whether the work the person does is essential to the employer’s business; and
• a factor regarding the worker’s skill and initiative.

A government examiner can consider any or all of the above factors and is free to introduce factors not listed above.

The reinstatement of these standards poses potentially serious consequences for companies, their owners, and even some non-owner administrative staff. If a business or other employer is found to have misclassified an employee as an independent contractor, the liability for unpaid overtime, minimum wages, and payroll taxes could be imposed on owners and responsible employees personally.

If you have questions about how to comply with the new Labor Department rule, contact your accounting firm, payroll service, or Fitzgibbons Law employment attorney.

From the U.S. Department of Labor:

• Rule: Independent Contractor Status Under the Fair Labor Standards Act
• Small Entity Compliance Guide
• Frequently Asked Questions