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DOL Issues Rule Clarifying the Classification of Workers

The Department of Labor (DOL) issued a new rule on January 6, 2021, that clarified the standard for classifying employees as independent contractors under the Fair Labor Standards Act (FSLA). The new rule is to go into effect on March 8, 2021.

The DOL acknowledges that the nature and degree of the individual’s control over the work and their opportunity for profit or loss will be the two biggest factors in determining what kind of employee they are.

However, under this new rule, an emphasis is put on the existing economic realities test which helps provide clarity on whether or not an individual has enough economic dependence to be considered an independent contractor by reviewing the five following factors:

• The nature and degree of the individual’s control over the work

This can include things such as an individual’s ability to set their own schedule, accept or decline projects, and work for others simultaneously.

• The opportunity for profit or loss

This focuses on the extent to which an individual has control or influence on how much they do or don’t earn through their own managerial skills, initiative, and overall business judgement. 

• The skill required for work

This looks at whether an individual relies on the training of the employer to perform their duties or if they have specialized training/skills that are specific to the tasks that they were hired to complete.  

• The permanence of the working relationship

This takes into consideration the duration of the scope of work and if it has a definite timeline, if it is sporadic or if it is indefinite and continuous. 

• Whether the work is part of an integrated unit of production

This focuses on to which extent an individual’s work is a regular component of the employer’s integrated production process for a good or service.

Additionally, they state that the actual practice is more relevant to the correct classification than what may have been asserted through contracts, verbal agreements, etc. They also shared some specific examples in which the economic realities test could be applied, such as:

  • The control factor in the long-haul transportation industry
  • The opportunity factor in the context of the gig economy
  • The permanence factor in the seasonal hospitality industry
  • The integrated factor in the context of the journalism industry
  • The opportunity factor in the construction industry

State laws regarding employment continue to apply and should be considered as well. For example, California has its own test known as the ABC test to determine if workers can be classified as independent contractors. All three prongs of the test must be met.

  1. The worker must be free of the company’s control and direction in connection with the performance of the work; and
  2. The worker must perform work that is outside the usual course of the hiring entity’s business; and
  3. The worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Prong number two is the most difficult for most employers to meet as the scope of work of various industries may not be easy to define as usual course of work.

Is there anything Payroll Systems can help you with as you accommodate rapid legislation changes? Reach out and talk to us about the easy-to-scale solutions you need for your business.

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This article provides general information and shouldn’t be construed as legal or HR advice. Since employment laws may change over time and can vary by location and industry, please consult a lawyer or HR expert for advice specific to your business. You can also contact Payroll Systems to inquire about our HR support services.