The U.S. Department of Labor (DOL) has announced a final rule clarifying the standard for classifying a worker as an independent contractor rather than employee under the Fair Labor Standards Act. The effective date of the final rule is March 8, 2021.
In its new rule, the DOL focuses on an “economic reality” test to determine whether the worker is economically dependent upon the employer for work or is actually in business for him/herself. The rule also specifies two “core factors” that are key to the analysis:
- The nature and degree of the employer’s control over the work, and
- The worker’s opportunity for profit or loss based on initiative and/or investment.
The rule also identifies other factors that may serve in the analysis.
The effect of the new rule is to make it easier to classify a worker as an independent contractor rather than an employee. It is not clear, however, whether this new rule will survive under the incoming presidential administration.
Despite this new DOL rule, Virginia employers should be very cautious about classifying a worker as an independent contractor. A new law enacted by the 2020 Virginia General Assembly provides a more stringent test for an employer to justify that classification. The statute states that “an individual who performs services for a person for remuneration shall be presumed to be an employee of the person.” It also provides that IRS guidelines should be used to determine independent contractor status. Those guidelines are not identical to the DOL guidelines. The penalties for misclassification under the Virginia law are potentially severe.
Feel free to contact us if you have questions about this matter.