DOL Finalizes Rules on Independent Contractors

On January 7, 2021, the DOL's Wage and Hour Division published final regulations related to independent contractor status under the Fair Labor Standards Act (FLSA). The division largely adopted the rules as proposed on September 25, 2020.

As background, many of the standards for determining whether a worker is an independent contractor or employee were developed through case law over the last 80 years. This led to overlapping rules, inconsistent application and confusion.

The division received over 1,800 comments on the proposed rules, and over 900 of them were from UBER drivers. The remaining comments were from other independent contractors, employers, labor unions, consultants and other stakeholders. Most of the comments were in support of the proposed regulations due to the lack of consistent rules in the past.

The DOL estimates that there are close to 19 million individuals that work as independent contractors for their primary or secondary source of employment. The most prevalent industries are construction and professional/business services. Based on various studies, the DOL reports that 79.4% of self-employed independent contractors have health insurance. Most of these workers either purchase insurance on their own (31.5 %) or have access through their spouse (28.6 %).

In adopting the final regulations, the WHD reviewed and considered all comments, which are detailed in the preamble. They specifically considered the widely publicized “ABC test” used in California for determining worker status. The preamble firmly rejects adopting that test as the federal standard, stating "the ABC test would be infeasible, difficult to administer, and disruptive to the economy if adopted as the FLSA standard." The final regulations generally apply across all industries. They replace regulations specific to tenants, sharecroppers, forestry and logging workers.

The rules adopt a distinct five factor test. There are two core factors that are considered to have more weight than the other three.

1) Control: The employer should consider the nature and degree of the worker's control over the work such as setting their own schedule, selecting their projects and the ability to work for others, which might include the potential employer's competitors.

2) Opportunity for profit or loss: The individual is more likely to be an independent contractor if they have an opportunity to earn profits or incur losses based on their exercise of initiative (such as managerial skill, business acumen or judgment) or management of their investment in, or capital expenditure on, such things as assistants, equipment or material.

The rules acknowledge that there may be additional factors to consider, but the additional three factors in the new test are:

3) The amount of skill required for the work: The employer should consider whether the work requires specialized training or skills that the employer does not provide.

4) The degree of permanence of the work relationship between the individual and the employer: This factor weighs in favor of an independent contractor if the work and the relationship are for a definitive period of time or occurs sporadically. The factor weighs in favor of the worker being an employee to the extent the work relationship is instead by design indefinite in duration or continuous.

5) Work integration with company production: The employer should consider whether the work is an integral unit of production. In other words, is the work a part of the employer's integrated process with goods or services or is the work outside of that core process?

Although this rule only addresses workers' independent contractor status under the FLSA primarily for minimum wage and overtime purposes, the DOL assumes that employers are likely to keep the status of most workers the same across all benefits and requirements. When considering the impact these rules have on benefits administration, employers should consider the new test in determining which workers are considered full-time employees for employer mandate and group health plan eligibility purposes. This categorization will also determine if offering benefits to these individuals will create a MEWA. Employers should consult with employment law counsel if they have any questions about this rule.

Final Regulations »