Independent Contractor or Employee?
In January, the US Department of Labor announced a final rule that clarifies the standard for determining independent contractor vs. employee status under the Fair Labor Standards Act (FLSA).
This final version of the regulation, which takes effect on March 8, now determines whether a worker is an employee entitled to overtime, minimum wage, and other FLSA protections or an independent contractor exempt from those requirements.
What is the New Independent Contractor Classification?
29 CFR Parts 780, 788, and 79 reaffirm that an economic reality test will identify whether an individual is an independent contractor or employee. The determination is based on two primary factors:
- The nature of the work and the degree of control exercised over it. Does the worker set their own schedule? Can they work for other clients, including the company’s competitors?
- The worker’s chance of profit or loss is based on initiative and/or investment. Can they make or lose money based on their own initiative or investment management or is their income solely determined by how many hours they work?
Three other factors that may serve as guidelines are:
- The amount of skill that the work requires
- The degree of permanence in the working relationship
- Whether the work is an integral part of the production process
As a general rule, when the first two factors conflict, the remaining three will help guide the analysis..
How is It Different From AB 5 and AB 2257?
When AB 5 became law in September 2019, it codified the three-prong ‘ABC’ test established in Dynamex. This test presumed that all workers were employees and required the employer to prove otherwise by showing that a contractor was:
- Free from the direction and control of the company when doing their work
- Doing work outside the normal scope of the company’s business
- Customarily engaged in a business, trade, or occupation involving the same work done for the contracting company
AB 5 also exempted certain industries, occupations, and contracted relationships (e.g., attorneys, doctors, architects, accountants) from this test and allowed hiring entities to use an earlier standard established in G. Borello & Sons, Inc. v. Department of Industrial Relations.
In October 2020, AB 2257 amended AB 5 by exempting additional business relationships and occupations and clarifying the professional services, referral agency, and business-to-business exemptions established by AB 5. However, it maintained that hiring entities must use the ABC test to classify a worker unless there was an exemption allowing the use of the Borello test instead.
While the new (and possibly final) regulation has a few things in common with earlier legislation, there are some differences that may leave you with questions. If you are concerned that your employer may be misclassifying you as an independent contractor, contact a California employment law attorney for advice.
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