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The impact of the legal definition of “employee” versus “independent contractor” under the Fair Labor Standard Act (“FLSA”) and other employment laws cannot be understated. The FLSA’s minimum wage and overtime requirements along with a vast array of other legal obligations employers owe to employees simply do not apply to independent contractors. Unhelpfully, various regulatory agencies and courts have looked in the past to similar, but not quite identical, tests of independent contractor status. With so much riding on the right classification both in terms of lawsuits and dollars, any clarification of which test an employer should look to is absolutely critical guidance to U.S. businesses.
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On January 6, 2021, the U.S. Department of Labor issued its final rule on Independent Contractor Status under the Fair Labor Standard Act (FLSA) outlining how employers can properly classify workers as independent contractors, instead of employees, which in practice means that the worker does not have to be paid minimum wage or overtime. This Rule, following a 30-day comment period during which the Department received over 1,800 comments, is a boon to employers as it provides clarity and more leeway in defining who is an independent contractor.
The Rule explains that the five-factor economic realities test governs the analysis of whether a worker can properly be classified as an independent contractor. This test is less restrictive on employers than those used in some states, such as California’s use of the ABC test. Under the five-factor economic realities test, the following is considered: