*UPDATE – THE FINAL RULE HAS BEEN WITHDRAWN MAY 6, 2021.

As I blogged about a few months ago, on September 22, 2020, the U.S. Department of Labor (DOL) announced a proposed rule simplifying the test to determine whether a worker is considered an “employee” under the Fair Labor Standards Act (FLSA) or an “independent contractor”. On January 6, 2021, the DOL announced the final rule, effective March 8, 2021.

The new rule clarifies that the DOL will use the “economic reality” test as the basis for whether a worker is an employee or independent contractor. The “economic reality” test considers whether a worker is: 1) in business for him/herself (thus, an independent contractor); or 2) economically dependent on an employer for work (thus, an employee). The DOL identifies two “core factors” in the analysis: 1) the nature and degree of the worker’s control over the work; and 2) the worker’s opportunity for profit or loss based on initiative and/or investment. These core factors hold the greatest weight in this determination. However, three lower impact factors to consider include: 1) the amount of skill required for the work; 2) the degree of permanence of the working relationship between the worker and the potential employer; and 3) whether the work is part of an integrated unit of production. Nonetheless, the DOL notes that treatment of the worker is more relevant than what is included in the worker’s contract (where applicable).

In addition, the DOL clarified in the summary (but not the actual rule) that the offering of certain benefits is not determinative by itself of a certain classification. For example, just because a worker is offered health and retirement benefits does not necessary mean the individual is an “employee” – so long as the offering is not the same as employees (i.e. the contribution should not be the same for employees and independent contractors). However, PTO, vacation and sick time benefits are indicative of an employer-employee relationship (as there is control over the work schedule). Additionally, whether a bonus is indicative of an employment relationship depends on the terms of the bonus – for example, a bonus or profit sharing plan based on performance over a period of time suggests economic dependence, but a contractual fixed bonus for completing a job by a deadline or a certain number of taxes over a fixed period is not more of a business relationship.

Again, employers should keep in mind that the IRS has its own test regarding whether a worker is an independent contractor or employee. Thus, employers should not only analyze the position based on the DOL test but the IRS test as well.