Department of Labor Finalizes Independent Contractor Classification Rule

“Economic Reality” Test Provides More Predictability as to When Workers Would Be Considered Employees or Independent Contractors, but the Biden Transition Team Has Announced Plans to “Potentially Freeze” the Rule Before it Takes Effect Sullivan & Cromwell LLP - January 13, 2021

On January 7, 2021, the U.S. Department of Labor (the “Department”) published a final rule establishing a new test for classifying a worker as an employee or an independent contractor under the Fair Labor Standards Act (the “FLSA” or the “Act”) (the “Final Rule”). The Final Rule, which contains five distinct factors, focuses on whether a worker is “economically dependent” on an employer for his or her employment. Two factors, “the nature and degree of control over the work” and “the individual’s opportunity for profit or loss,” carry the most weight under the rule. Courts have previously evaluated the worker-employer relationship under competing multi-factor tests with overlapping factors. The Department’s new five-factor test, which includes examples of facts weighing in one direction or the other, as well as examples of how the test should be applied in various situations, provides more predictability as to when a worker falls under the FLSA’s minimum wage and overtime provisions. Although the Final Rule is scheduled to take effect on March 8, 2021, the Biden transition team has announced plans to “potentially freeze” the rule prior to that date.