The Department of Labor Publishes Final Rule on Independent Contractor Status

On January 6, 2021, the Department of Labor (“DOL”) announced its final rule intended to address and clarify what is commonly known as the Misclassification issue under the Fair Labor Standards Act.  The Misclassification issue concerns whether an individual is an employee or independent contractor.  In its final rule, published in the Federal Register on January 7, the DOL reaffirms that the “economic reality” test will determine whether an individual is an employee or an independent contractor under the law.  The final rule takes effect on March 8, 2021.  The analysis has significant consequences for the construction industry.

The DOL’s final rule on employee or independent contractor classification under the Fair Labor Standards Act notes that the law defines an employee as an individual whom an employer suffers, permits, or otherwise employs to work.  An employer suffers or permits an individual to work as an employee if, as a matter of “economic reality”, the individual is economically dependent on that employer for work.  In contrast, an individual is an independent contractor if the individual is, as a matter of “economic reality”, in business for himself or herself.

The rule notes that there are two core factors that determine the individual’s economic independence.  These two core factors are deemed to have greater probative value than other factors provided in the final rule.  Indeed, the final rule expressly states that if the two core factors both point towards the same classification, whether employee or independent contractor, there is a substantial likelihood that is the individual’s accurate classification.

The first of the two core factors is the nature and degree of control over the work.  Where an individual sets his or her own schedule, selects his or her own projects, and works for others (including the potential employer’s competitors), this factor weighs toward the individual being an independent contractor, according to the final rule.

Important for the construction industry, the final rule notes that, with regard to this first core factor, requiring the individual to comply with specific legal obligations, satisfy healthy and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards that are typical of contractual relationships between businesses do not constitute control that makes the individual more or less likely to be an employee.

The second of the two core factors concerns the individual’s opportunity for profit or loss.  To the extent the individual has an opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen or judgment) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work, this factor weighs in favor of independent contractor status.  On the other hand, if the individual is unable to affect his or her earnings or is only able to do so by working more hours or faster, the factor will weigh in favor of the individual being classified as an employee.  Consider your workers who are paid by the hour or by the piece and whether you are properly classifying them as employees under this factor.

The final rule identifies the following non-core factors as part of the analysis:  the amount of skill required for the work; the degree of permanence of the working relationship between the individual and the potential employer; whether the work is part of an integrated unit of production; and a catch all for factors relevant to the analysis of whether an individual is in business for himself or herself, as opposed to being economically dependent on the potential employer for work.

Interestingly, the final rule does provide several examples of scenarios involving the Misclassification analysis.  One of the examples does involve the construction industry.  The example concerns the opportunity factor in the context of the construction industry and clarifies the concept of economic independence.  In the example, an individual worker works full time performing home renovation and repair services for a residential construction company.  In performing the construction work, the worker is paid a fixed hourly rate, and the company determines how many and which tasks she performs.  Perhaps to nobody’s surprise, the final rule concludes this individual is an employee.  In reaching the conclusion, the final rule notes that the worker does not have a meaningful opportunity for profit or loss based on her exercise of initiative or investment because the company determines the assignment of work and she is paid a fixed hourly rate.

Under President Obama, the Misclassification issue was under the microscope.  Under President Biden, we can expect much of the same.  Misclassifying an employee as an independent contractor can result in significant financial consequences.  In light of the DOL’s final rule and the change in administration, now is as good a time as ever to revisit whether you are properly classifying your workers as either independent contractors or employees.

About the Author

Philip Siegel is a partner and shareholder with the firm Hendrick, Phillips, Salzman & Siegel, P.C., whose practice focuses on labor and employment matters within the construction industry.  Hendrick, Phillips, Salzman & Siegel is general counsel to the North/East Roofing Contractors Association.  Philip has an undergraduate B.B.A. from the University of Michigan, and he obtained his law degree from Emory University School of Law.  Philip can be reached at either (404) 469-9197, or via e-mail at pjs@hpsslaw.com.