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Department of Labor Issues Final Rule Regarding Employee Classification, Providing Further Guidance on Independent Contractors

Las Vegas, NV (January 11, 2021) – For quite some time, there has been debate and confusion for employers surrounding employee classification, particularly when it comes to independent contractors. Employers covered by the Fair Labor Standards Act (“FLSA”) are well versed that they are required to pay nonexempt employees at least the Federal minimum wage for every hour worked and overtime pay for every hour worked over 40 in a work week and must keep certain records regarding their employees. See 29 U.S.C. §§ 206(a), 207(a) (minimum wage and overtime pay requirements); 29 U.S.C. § 211(c) (recordkeeping requirements). But the FLSA does not define the term “independent contractor” and with the proliferation of gig and freelance workers and alternate work arrangements – especially with the expansion and ease of engaging workers remotely – the ability to predict whether a worker is properly engaged as an independent contractor can be difficult.

In response to the need to better define who qualifies as an independent contractor, on January 6, 2021, the Wage and Hour Division of the U.S. Department of Labor (“DOL”) issued a Final Rule that sets forth a revamped multifactor “economic reality” test to determine whether a worker is an independent contractor or an employee under the FLSA.  The Final Rule is aimed at providing better predictability over inconsistencies in prior court and DOL interpretations of the former “economic realities test.”

The economic reality test generally focuses on whether a worker is in business for herself or himself (independent contractor) or is instead economically dependent on an employer for work (employee), concentrating on two “core factors,” although no single factor is dispositive: (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, investment, or both. The Final Rule explains that these two factors “are more probative of the question of economic dependence or lack thereof than other factors, and thus typically carry greater weight in the analysis than any others.” Independent Contractor Status Under the Fair Labor Standards Act, 86 Fed. Reg. 1168 (January 7, 2021) (29 CFR Parts 780, 788 and 795). In other words, if both core factors point one way or the other, “there is a substantial likelihood that is the individual’s accurate classification.” Id. at 1246.

Three additional guideposts are articulated in the Final Rule, though they carry less weight than the core factors: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the individual and the potential employer; and (3) whether the work is part of an integrated unit of production. The DOL also included a catch-all category wherein additional factors may be considered “but only if the factors in some way indicate whether the individual is in business for him-or herself, as opposed to being economically dependent on the potential employer for work.” Id. at 1247. As before, any analysis necessarily focuses on the actual practice instead of any contractual agreement or what could potentially happen. Id. To assist with the analysis, the Final Rule includes six examples that walk through the economic reality factors.

Previously, the provision of benefits was often a factor that weighed in favor of finding an employment relationship; however, with some caveats, the Final Rule recognizes that businesses can offer health, retirement and other benefits without altering a worker’s employment status. Nevertheless, businesses should avoid offering identical benefits to employees and independent contractors because the Final Rules makes it clear that “providing a worker with the same employer-provided health or retirement plans on the terms that a business also gives its own employees may indicate the worker is not an independent contractor but rather an employee.” Id. at 1185. Further, certain types of benefits – sick or other paid leave, and the businesses’ approval and administration of such paid leave – is a bridge too far and “could be indicative of the potential employer’s control over the worker’s schedule.” Id. Other benefits like bonuses fall into a murky area under the Final Rule and will depend on the structure and reason for the bonus. Id.

What does this mean for your Nevada business? On March 2, 2021, the DOL announced the effective date of the Final Rule will be pushed from March 8 to May 7, 2021. Previously, the incoming Biden administration expressed negative comments about the last-minute passage of the Final Rule. But if the Final Rule goes into effect, it embodies the DOL’s acknowledgment that independent contractors are important and integral components of the economy and our laws need to evolve with real-world changes in the workplace. However, a multi-factor test that ultimately looks at the actual practice of the relationship will still require careful consideration in light of the serious misclassification consequences. At the state level, in 2019, Nevada enacted a wage and hour law that presumes the existence of an independent contractor relationship if certain criteria are met. NRS 608.0155. While similarities exist with the Final Rule, the criteria are not identical, leaving open the possibility that analyses could lead to varying results. If you are considering engaging a worker on an independent contractor basis, please reach out to one of the attorneys in the Firm’s Employment & Labor Law Practice Group.

About McDonald Carano

In 2024, McDonald Carano celebrates 75 years of serving Nevada’s legal, business, government, and civic communities. More than 60 lawyers and government relations professionals serve Nevada, national, and international clients from our offices in Reno, Las Vegas, and Carson City. McDonald Carano provides legal services and government affairs and advocacy advice to startups, corporations, private companies, trade associations, nonprofits, public entities, high-net-worth individuals, and family offices throughout Nevada. We are proud to be your Nevada law firm since 1949.

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