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January 28, 2021

Q: What is the Fair Labor Standards Act (FLSA) rule for worker classification?

Learn how the FLSA rule for worker classification works and what the implications are for companies.

What is the Fair Labor Standards Act (FLSA) rule for worker classification?

Compliance Ask Liquid Finance and Accounting Freelancer Management

On January 7, 2021, the U.S. Department of Labor (DOL) published a final rule under the Fair Labor Standards Act (FLSA) regarding whether a worker should be classified as an employee or an independent contractor. The rule is intended to bring clarity to the classification standards and was also in part a response to laws such as California’s AB5. The rule is in effect as of March 8, 2021. 

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The U.S. Secretary of Labor, Eugene Scalia, issued a statement that said: “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.” 

Economic Reality Test for the Fair Labor Standards Act (FLSA)

The new rule under the FLSA 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).” 

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    Core Factors for the FLSA Rule

    There are two “core factors” that are the primary determinants of whether workers are economically dependent on someone else’s business or in business for themselves. These two factors are:

    • Nature and degree of control over the work performed
    • Opportunity for profit or loss by the worker based on initiative and / or investment

    Secondary Factors for the FLSA Rule

    There are also 3 secondary factors that may be considered in worker classification analysis, particularly if the 2 core factors don’t yield the same conclusion regarding classification.

    • Amount of skill required for the work
    • Degree of the permanence of the working relationship between the worker and the potential employer
    • Whether the work is part of an integrated unit of production 

    Implications of the Fair Labor Standards Act (FLSA) Rule

    At this time, it’s unclear how the FLSA rule may be impacted either in terms of applicability or longevity under the Biden administration. For example, the Biden administration may choose to pause or rescind the rule.  

    The rule only applies to the DOL’s interpretation of the FLSA’s independent contractor classification and per the DOL “is not binding” on state governments. This means that relevant state and local laws for worker classification, such as California’s AB5 or New York City’s FIFA, still apply. 

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    Category: Compliance Ask Liquid Finance and Accounting Freelancer Management

    Updated: January 28, 2021

    Quick note: This is not to be taken as tax advice or legal advice or payroll advice. Since tax rules and laws change over time and can vary by location and industry, consult a CPA / tax advisor and/or attorney for specific guidance.

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