DOL Issues Final Rule on Independent Contractor Status

Whether a worker is an employee or independent contractor can be vitally important when it comes to the application of numerous laws. In Iowa, nondiscrimination laws, wage collection laws, restrictive covenant provisions, tax laws, and wage and hour laws all apply typically to employees but not independent contractors.

On January 6, 2021, the Department of Labor (DOL) published a final rule clarifying the standards and tests to be utilized in determining whether a worker is an employee or an independent contractor under the Fair Labor Standards Act. The final rule takes effect on March 8, 2021.

In the final rule, the DOL reaffirms that it intends to employ an “economic reality” test to evaluate whether a worker is in business for herself or is economically dependent on an employer. The final regulations identify two “core factors” to utilize when determining whether someone is an employee of independent contractor:

• The nature and degree of control over the work by the alleged employer.
• The worker’s ability to generate profit or loss based on how the work is performed.

The final rule also looks to additional factors to determine the proper status of a worker: (1) the amount of skill required; (2) the temporal duration of the working relationship between the worker and the alleged employer; and (3) whether the work in question is part of an “integrated unit” of production.

The final rule stresses that it is the actual conduct of the parties that should be emphasized. The new rule also walks through a series of examples.

For the last decade, the leading independent contractor case in Iowa has been Ernster v. Luxco, Inc., 596 F.3d 1000 (8^th Cir. 2010), a case tried by Nyemaster Goode. In that case, the court employed a multifactor test when instructing the jury how to determine if the plaintiff was an employee or independent contractor. While slightly different than the final Department of Labor rule, the elements set forth in Ernster remain a useful tool for employers analyzing whether a worker is an independent contractor or an employee for pay, tax and non-compete purposes.

Although the final rule is scheduled to go into effect on March 8, 2021, the incoming Biden Administration has avenues to potentially block its implementation.  President-elect Biden has the authority to direct all agencies to delay the effective date of any pending-but-not-yet-effective regulations, subject to further review, a practice often used when the presidency changes parties. Regardless of any legal challenges that might be lodged against such a directive, the Biden Administration could issue a new rule, rescinding this final rule. In addition, under authority of the Congressional Review Act, the Democratic majority in the Senate and House could rescind the new rule with presidential approval.

Nyemaster Goode’s Labor & Employment Law practice group is experienced in counseling employers with issues concerning proper classification of workers as employees or independent contractors.  Clients with questions regarding the new independent contractor final rule of the proper classification of workers should contact one of our labor and employment attorneys.