A recent federal court ruling clears the way for a uniform standard to be applied for determining what defines an independent contractor under the Fair Labor Standards Act (FLSA).
The mid-March 2022 decision from a federal court in Texas reinstates the Independent Contractor (IC) Final Rule, which was supposed to take effect in March 2021. The court held the U.S. Department of Labor unlawfully withdrew the IC Final Rule after first delaying the rule from taking effect.
Now, the rule’s original effective date remains in effect.
An analysis in the National Law Review publication says a key issue in the case was the manner in which the IC Final Rule was withdrawn and the assertion that replacement regulatory guidance was not issued. According to the National Law Review report, the Texas federal court concluded the Department of Labor violated the Administrative Procedure Act, which outlines the rulemaking protocols for federal administrative agencies.
Under the FLSA, independent contractors are not afforded the same minimum wage and overtime protections that non-exempt employees are. However, employers long have struggled making a distinction in what constitutes an independent contractor versus an employee. Experts say that’s largely due to varying standards and inconsistent application of determining factors by the courts and Department of Labor.
Guidelines do tend to focus on the “economic reality” of the employer-individual relationship and are based on seven factors, according to the Department of Labor:
- The extent to which the services rendered are an integral part of the principal’s business.
- The permanency of the relationship between the individual and the company.
- The amount of the contractor’s individual investment in facilities and equipment.
- The nature and degree of company control over the work performed.
- An individual’s opportunities for profit or loss.
- Skills and/or expertise required to perform the work.
- The degree of independent business organization and operation.
The IC Final Rule uses the amount of control over the work and the individual’s opportunity for profit or loss as the two primary considerations for determining whether someone is classified as a Form 1099 independent contractor or a Form W-2 employee. The other factors will be secondary considerations if the two core factors are not determinative.
Employment law experts say the IC Final Rule aims to provide clarity and uniformity to how those economic reality factors are analyzed.
While that’s the ultimate goal, the Texas federal court ruling still could be challenged or appealed. The Department of Labor could also undertake a formal rulemaking process on creating standardized guidelines. Meanwhile, this DOL fact sheet provides general information about how employment relationships are defined under the FLSA.
Remember, the court ruling applies only to how an independent contractor is defined under the FLSA. National Law Review notes the IC Final Rule would not define an independent contractor under the Internal Revenue Code, the National Labor Relations Act or other applicable federal laws.
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