US Department of Labor clarifies independent contractor rules

Tonda Rush

Jan 12, 2021

The Trump Administration Labor Department in its final days has issued new regulations for determining when individuals are considered independent contractors rather than employees.

Under the Fair Labor Standards Act (FLSA) employers are required to pay at least minimum wage to employees and provide overtime pay for work done on the employer’s behalf in excess of 40 hours each week. Independent contractors are in business for themselves and not eligible for the FLSA compensations. The distinctions between the two have been blurred by many years of regulations and court interpretations.

The new rule puts less emphasis upon what the contract between the two parties says and more on actual practice, focusing on the economic relationships. An important factor will be the individual’s opportunity for profit or loss, rather than dependence upon a wage controlled by the retaining business. The degree of control the individual has over his or her work is the other primary factor.

The Department explains that the control analysis could examine whether the individual sets his own schedule, selects projects and works for others, potentially including the engaging business’s competitors. But requiring compliance with deadlines, health and safety specifications and insurance coverage would not convert a contractor to an employee.

The opportunity for profit factor may include such elements as the worker’s investments in capital equipment that enhance the potential for greater earnings. The profit factor must include more than a worker’s simply putting in more hours to earn more. There must be an opportunity for greater earnings through initiative or management of the individual’s investment.

The Department has not eliminated other factors that previously were considered in determining whether a person is an employee or a contractor. For example, skill required, the degree to which work is integral to a business’s enterprise.

The new guidance cites examples, including two from the newspaper industry:

  • An editor who works part time from home reviewing articles and laying them out, making assignments and coordinating with other editors, is likely an employee because she is integrated into the operation and does work similar to that of employees;
  • A writer who also works from home, does 2-3 stories a week, which the newspaper may accept or reject, never makes assignments to others and is segregated from the rest of the operation, is likely a contractor.

The guidance points out that working from home is not relevant to the classification.

The Labor Department’s new rules are here.

The rule goes into effect March 8, 2021.