Labor Dept. clarifies employee vs. independent contractor rule

Classifying employees or independent contractors has become more muddled during the Covid-19 crisis that has only increased the reliance on gig economy workers.

In an attempt to bring clarity, the Labor Department finalized its rule earlier this month for determining whether a worker is considered an employee or an independent contractor.

U.S. Secretary of Labor Eugene Scalia said in a statement, “Sharpening the test to determine who is an independent contractor under the Fair Labor Standards Act makes it easier to identify employees covered by the Act, while recognizing and respecting the entrepreneurial spirit of workers who choose to pursue the freedom associated with being an independent contractor.”

The new rule contains the following provisions:

  • It reaffirms an “economic reality test” to determine whether the individual is an independent contractor in business for him or herself or is economically dependent on a potential employer for work, therefore an FLSA employee.
  • It identifies and explains two “core factors” that help identify whether a worker is an independent contractor or is an employee:
    • The nature and degree of control over the work;
    • The worker’s opportunity for profit or loss based on initiative and/or investment
  • It identifies three other factors that may serve as guideposts, especially when the two core factors do not point to the same classification:
    • The amount of skill required for the work;
    • The degree of permanence of the working relationship between the worker and the potential employer; or
    • Whether the work is part of an integrated unit of production.
  • The actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
  • It provides six fact-specific examples applying the factors.

The rule is scheduled to take effect March 8, and it may face legal challenges in the Biden Administration. Meanwhile, you may find the final rule here.

Please let us know if you have any questions.

Tammy Howell is a Manager with our Business & Tax Advisory Group. She can be reached at