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Employee Classification in the Gig Economy

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Employee Classification in the Gig Economy

Department of Labor Issues New Rule Regarding Independent Contractor Classification

Over the last several years the gig economy has brought the issue of employee classification to the forefront of the national agenda. Impacts of COVID-19 on the economy and, in particular, this sector of the work force have heightened the importance of this issue.

On Wednesday, January 6, 2021, the Department of Labor (“DOL”) issued a new rule regarding Independent Contractor Status under the Fair Labor Standards Act (“FLSA”). The Rule is set to take effect on March 8, 2021. The current administration asserts the Rule provides clarity in this complicated area while “respecting” the entrepreneurial interests of those who do not wish to be employees. Explaining that “independent contractors are workers who, as a matter of economic reality, are in business for themselves as opposed to being economically dependent on the potential employer for work.”

The new Rule lays out a five-part test, primarily based on the so-called “economic reality” of the relationship between the parties. It establishes two “core” factors on which the analysis turns:

(1) the nature and degree of control over the work; and,

(2) the worker’s opportunity for profit or loss based on initiative and/or investment.

The DOL asserted it focused on these factors because they are “the most probative of whether workers are economically dependent on someone else’s business or are in business for themselves.” There are three additional factors that may provide guidance when the first two do not indicate a clear determination. They are:

(3) the amount of skill required for the work,

(4) degree of permanence of the relationship, and

(5) whether the work is part of an integrated unit of production.

The DOL made clear that the actual practice between the parties is more probative than a contract or theoretical possibility, likely meaning how the relationship is in fact carried out will be of significance in these assessments, not just the parameters of the parties’ contract.

The DOL received 1800 comments concerning this new Rule. Some labor unions opposed the new Rule and some who commented even asserted it was not within the Department’s authority to issue such a rule. Given the Rule’s effective date and the change in administration, employers, including nonprofits who rely on independent contractors, should continue to monitor whether this new Rule remains as is or faces further changes in the coming months or years. The Biden administration could delay its implementation or even attempt to change the Rule, though it would have to go through the formal rulemaking process including notice and comment. Though this is yet to be known, it is likely 2021 will continue to see further developments in this area of the law.

As always, if you have questions as to classification of your workforce, it is best to consult with legal counsel. Misclassification of workers can be costly to an organization, including tax liabilities, costs of benefits, and overtime and wage payments.

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