Independent Contractor Rule Clarified; Definition Eased for Now

The new federal rule comes against a backdrop of a new California law that runs counter to it.

authors QR Staff | January 7, 2021

A tricky issue for many remodelers and home improvement companies was clarified Wednesday when the U.S. Department of Labor announced a final rule clarifying the standard for employee versus independent contractor status under the Fair Labor Standards Act (FLSA).

“This rule brings long-needed clarity for American workers and employers,” said U.S. Secretary of Labor Eugene Scalia. “Sharpening the test to determine who is an independent contractor under the Fair Labor Standards Act makes it easier to identify employees covered by the Act, while recognizing and respecting the entrepreneurial spirit of workers who choose to pursue the freedom associated with being an independent contractor.”

“Streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility,” said Wage and Hour Division Administrator Cheryl Stanton. “The rule we announced today continues our work to simplify the compliance landscape for businesses and to improve conditions for workers. The real-life examples included in the rule provide even greater clarity for the workforce.”

The Final Rule includes the following clarifications:

  • Reaffirms an “economic reality” test to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee). 
  • Identifies and explains two “core factors” that are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself:
    • The nature and degree of control over the work.
    • The worker’s opportunity for profit or loss based on initiative and/or investment.
  • Identifies three other factors that may serve as additional guideposts in the analysis, particularly when the two core factors do not point to the same classification. The factors are:
    • The amount of skill required for the work.
    • The degree of permanence of the working relationship between the worker and the potential employer.
    • Whether the work is part of an integrated unit of production.
  • The actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
  • Provides six fact-specific examples applying the factors.

March 8th Effective Date

The rule will take effect 60 days after publication on the Federal Register, on March 8, 2021.  Some in the industry wonder whether the new rule may be delayed or altered by the incoming administration.

Home improvement industry legal expert D.S. Berenson, managing director, Berenson LLP, expressed doubts about whether the new administration will get behind the new rule. The federal rule announcement, Berenson said, comes amidst a backdrop where California new A.B. 5 legislation took effect on January 1, 2020.

The California law requires, “in essence, that an independent contractor could only perform services outside the usual course of business of the employer,” Berenson wrote in a recent newsletter to clients. “In other words, anyone performing  services that were part of the normal business of the employer, was going to be considered an employee – and subject to California’s expansive workplace rights and protections, including minimum wage, overtime pay, rest break, paid sick leave, paid family leave, and health insurance benefits – all of which is very similar to how Massachusetts addresses worker classification which also has been roundly criticized for its near-sighted law.”

Berenson notes that the new administration has already released a comprehensive labor plan that cites the California law as a model to consider.

Qualified Remodeler will continue to provide updates to this story in the coming days and weeks. QR

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