As one of its first initiatives for the new year, the U.S. Department of Labor (DOL) published a Final Rule on January 7, 2021 to clarify whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The new rule becomes effective March 8, 2021.

The rule reaffirms use of the “economic realities” test, which looks at the extent of the worker’s economic dependence from the potential employer. The DOL says that the ultimate inquiry is “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).”

The rule then sharpens the inquiry into economic dependence by looking at five distinct factors. Although no single factor is dispositive, the inquiry mainly focuses on two core factors: (1) the nature and degree of the worker’s control over the work and (2) the worker’s opportunity for profit or loss. The analysis is also guided by the other three factors: (3) the amount of skill required for the work, (4) the degree and permanence of the working relationship between the worker and the potential employer, and (5) whether the work is part of an integrated unit of production. The rule gives great weight to actual practices over what may be contractually or theoretically possible.

Previously, the economic realities test and the many relevant inquiry factors were applied inconsistently, creating uncertainty. The DOL revised the rule to promote certainty, reduce litigation, and encourage innovation in the economy. Note that this revised test applies to inquiries under the FLSA, but states and state agencies may continue to utilize their own tests to determine independent contractor status.