On Jan. 7, 2021, the Department of Labor (DOL) published its final rules for determining whether a worker is an independent contractor or an employee for purposes of the Fair Labor Standards Act (FLSA). The rules take effect on Mar. 8, 2021. The rules are important because businesses and organizations must comply with the wage and hour provisions of FLSA for employees but not for independent contractors. Although school districts do not routinely deal with the scenario of questioning whether someone is an employee or independent contractor, it does come up on occasion.

The DOL final rules reaffirm the “economic reality” test, which has been used by the courts for years, to determine if a person is an independent contractor or an employee under FLSA. The two main factors for this test are the nature and degree of the individual’s control over his or her work and opportunity for profit or loss based on initiative and/or investment. 

The “nature and degree of control over the work” factor of the test examines if the individual exercises substantial control over key aspects of the performance of his or her work, such as setting his or her own schedule, selecting projects, and the ability to work for more than one client, including clients who may be competitors of one another. If the individual is able to demonstrate a significant nature and degree of control over his or her work by showing these items, it is likely that he or she is an independent contractor for purposes of FLSA. However, a business or organization requiring the individual to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses, do not constitute sufficient control over the individual to classify him or her as an employee.

The other factor of the test is the individual’s opportunity to earn profits or incur losses based on his or her exercise of initiative or management of his or her investment in, or capital expenditure to further, the work. “This factor weighs towards the individual being an employee to the extent the individual is unable to affect his or her earnings or is only able to do so by working more hours or more efficiently.” 

Greater weight is afforded to these two core factors. If both factors point towards the same classification, whether employee or independent contractor, there is a substantial likelihood that is the individual's accurate classification. If not, the final rule provides other factors.

The three other factors are the amount of skill required for the work, degree of permanence of the working relationship, and whether the work is part of an integrated unit of production. If the worker has a specialized skill and does not depend on the employer for their training, the “skill required” factor weighs in favor of the worker being an independent contractor. The “permanence of the working relationship” factor examines whether the work duration is, by design, definite or sporadic (suggesting that the individual is an independent contractor) or indefinite or continuous (suggesting that the person is an employee). The final factor, whether the “work is part of an integrated unit of production,” examines whether the individual’s work is segregable from the employer’s production process. If so, this factor weighs in favor of the worker being an independent contractor.

More information is available in the DOL executive summary of the rules, which includes the amendments. If you have additional general questions about these amendments, or your obligations or responsibilities under U.S. or Ohio Laws, please contact the Division of Legal Services at (855) OSBA-LAW.

Posted by Ralph Lusher III on 1/23/2021