DOL Finalizes Regulations Regarding Worker Classifications

January 7, 2021 | Jonathan B. Bruno | Michelle Vizzi | Employment & Labor

On January 6, 2021, the Department of Labor (DOL) issued a new framework to determine whether workers are employees or independent contractors for the purposes of the Fair Labor Standards Act (FLSA). The distinction between these classifications is significant, as it impacts whether the employer must pay minimum wage or keep records pertaining to the worker.

The DOL estimates that there are between 15.6 million and 22.1 million individuals in the United States who work as independent contractors as either their primary or secondary job. The new framework clarifies the previous standards set out in the case law, which were confusing – and sometimes contradictory – as the term “independent contractor” is not defined by statute.

The DOL’s new framework provides five factors to consider in determining whether someone is an employee or an independent contractor:

  1. the nature and degree of the worker’s control over the work;
  2. the worker’s opportunity for profit or loss;
  3. the amount of skill required for the position;
  4. the permanence of the working relationship; and
  5. and how integrated the worker’s role is to the organization’s overall operation.

These factors look to determine whether, as a matter of economic reality, the worker is dependent on a particular individual, business or organization for work (and is thus an employee) or is in business for him- or herself (and is thus an independent contractor).

Importantly, the DOL has clarified that the first two factors – the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss – are most important. In determining how much control a worker has, one should look at whether the worker exercises substantial control over key aspects of the performance of the work, such as by setting his or her schedule, by selecting his or her projects and/or through the ability to work for others, which might include the potential employer’s competitors. However, the DOL notes that requiring a worker to comply with specific legal obligations, satisfy health and safety standards, carry insurance, etc. does not constitute “control” for the purpose of this factor.

The second factor – the opportunity for profit or loss – looks to the extent the individual has an opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill, business acumen or judgment) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work. If consideration of these two factors points to the same conclusion, there is no need to look to the amount of skill required for the position, the permanence of the working relationship or how integrated the worker’s role is to the organization’s overall operation.

This new rule also allows employers to offer benefits to independent contractors without those workers being deemed employees. For example, a business looking to attract better independent contractors can now offer health or retirement benefits. However, the DOL noted that if these benefits are the same as those given to employees, such benefits may indicate that the worker is not an independent contractor but rather an employee. Thus, employers who decide to extend benefits to independent contractors must be cognizant of how those benefits compare to those being offered to other employees, as the benefits may inadvertently change an independent contractor into an employee.

Overall, this new framework should give employers more certainty when trying to hire and distinguish employees and independent contractors and help them avoid FLSA violations based on worker categorization.

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