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Final Rule: Independent Contractor Status under the Fair Labor Standards Act

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29 CFR Parts 780, 788, and 795

A final rule clarifying the standard for employee versus independent contractor status under the Fair Labor Standards Act (FLSA) was announced by the Department of Labor (Department) on January 6, 2021. The effective date of the final rule is March 8, 2021 and includes a multi-factor test for determining whether workers are independent contractors, meaning that the business they perform work for doesn’t have to pay minimum wage or overtime that the Fair Labor Standards Act requires for employees.

Clarifications in the final rule

  • Sets forth an “economic reality” test to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee.)
  • Identifies and explains two “core factors” that are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself:
    • The nature and degree of control over the work.
    • The worker’s opportunity for profit or loss based on initiative and/or investment.
  • Identifies three other factors that may serve as additional guideposts in the analysis, particularly when the two core factors do not point to the same classification. The factors are:
    • The amount of skill required for the work.
    • The degree of permanence of the working relationship between the worker and the potential employer.
    • Whether the work is part of an integrated unit of production.
  • Provides that the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
  • Provides six fact-specific examples applying the factors.

The final rule was published in the Federal Register on January 7, 2021.

Will the independent contractor status Rule be permanent? 

The rule clarifying independent contractor status is scheduled to become effective on March 8, 2021. However, a spokesperson for the Biden administration called out the rule as one that the administration is likely to revise in the days before its publication, bringing into question whether it will ever be permitted to take effect. In addition, independent contractor/employee status has been the topic of a great deal of litigation in recent years, so we can expect to see challenges should the rule is permitted to take effect.

Employees Working Remotely May Be Entitled to Overtime

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overtime during COVID-19

Employees working remotely may be entitled to overtime. When state and local governments began issuing stay-at-home orders in response to the COVID-19 pandemic, many employees suddenly found themselves working from home. This change in practice has increased the likelihood that employees will be working overtime. In many instances, employees working remotely will have access to technology or be taking on new responsibilities that they didn’t have when they worked primarily from their offices.

Basic overtime regulations

The federal Fair Labor Standards Act (FLSA) governs overtime pay and record keeping for part-time and full-time workers in the private and public sectors. The FLSA divides employees into two categories. Nonexempt employees are generally paid hourly and are entitled to overtime pay at one and one-half times their regular rate of pay beyond a 40-hour workweek. Employees are exempt from minimum wage and overtime pay requirements if they work in certain executive, administrative, professional and outside sales positions. Exempt employees are generally salaried and not entitled to overtime pay. However, they must be paid the same amount per pay period, regardless of how many hours they work. That is, they must be paid the same even if they work more or less than 40 hours.

“Off the Clock” work may result in overtime

Recent guidance from the Department of Labor notes that employers may encourage or require employees to work from home to control the spread of COVID-19. Employers, however, are not required to have telework programs in place. Working remotely does not change the federal wage-and-hour laws; they apply the same to employees working from home. And the same overtime laws still apply to employees working from home.

With large numbers of nonexempt employees working remotely, employers may have difficulty monitoring the number of hours the employees are actually working. And many employers may be unable to use the same compliance measures they used in the workplace to monitor the hours worked by their employees. Without such measures, it’s easy to see how employees could end up working longer than a normal eight-hour workday. Typical off-the-clock tasks such as reading and responding to emails, text messages and phone calls or conducting “a few minutes of research” can add up over the course of a week and lead to a claim for unpaid overtime wages.

While working from home may cut down on the time employees lose to commuting, it may also increase the chances that employees working remotely feel compelled to work overtime. As such, any employers should take reasonable steps to ensure that its nonexempt workers are being paid overtime for each hour its remote workers are performing, including any “off-the-clock” work performed on mobile phones or tablets.

COVID-19 and the Fair Labor Standards Act’s Protections for Workers

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Due to the crisis surrounding the Coronavirus and Covid-19, millions of Americans have been forced to grapple with less than ideal working conditions such as reductions in pay, requests by employers to “volunteer” for a period of time, the loss of overtime pay or the loss of employment altogether. The Fair Labor Standards Act (FLSA) provides numerous protections for workers, including the following:

If your employer has asked you to “volunteer” to help out as a result of the Covid-19 crisis, you may want to consider the FLSA’s stringent requirements with respect to the use of volunteers.  In general, workers protected under the FLSA that are working for private, for-profit employers must be paid at least the minimum wage and cannot be expected to volunteer their services.  

If you have been laid off and have not received your last paycheck, immediate payment may be required by state law (although it is not required by federal law).  If your regular payday has passed without payment, you may be entitled to compensation under federal and/or state law.

How many hours is an employer obligated to pay an hourly-paid employee who works a partial week because the employer’s business closed? The FLSA generally applies to hours actually worked.  It does not require employers who are unable to provide work to non-exempt employees to pay them for hours the employees would have otherwise worked.

What are an employer’s obligations to an employee who is under government-imposed quarantine? The U.S. Department of Labor’s Wage and Hour Division (WHD) encourages employers to be accommodating and flexible with workers impacted by government-imposed quarantines. Employers may offer alternative work arrangements, such as teleworking, and additional paid time off to such employees.

May an employer encourage or require employees to telework (i.e., work from an alternative location such as home) as an infection control strategy? Yes. An employer may encourage or require employees to telework as an infection-control or prevention strategy, including based on timely information from public health authorities about pandemics, public health emergencies, or other similar conditions. Telework also may be a reasonable accommodation.

Of course, employers must not single out employees either to telework or to continue reporting to the workplace on a basis prohibited by any of the EEO laws. (See the U.S. Equal Employment Opportunity Commission’s publication, Work at Home/Telework as a Reasonable Accommodation, for additional information.)

Do employers have to pay employees their same hourly rate or salary if they work at home? Under the FLSA employers generally have to pay employees only for the hours they actually work, whether at home or at the employer’s office.  However, the FLSA requires employers to pay non-exempt workers at least the minimum wage for all hours worked, and at least time and one half the regular rate of pay for hours worked in excess of 40 in a workweek.  Salaried exempt employees generally must receive their full salary in any week in which they perform any work, subject to certain very limited exceptions.

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For additional information, contact the DuBose Law Firm, PLLC, at (214) 389-8199.

Additional Employees Are Eligible for Overtime in 2020

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As of September 24, 2019, an estimated 1.2 million employees will be eligible for overtime in 2020. This came about with an increase in the “white collar” exemption by the U.S. Department of Labor. It supports the mandate for overtime pay included in the Fair Labor Standards Act. It becomes effective January 1, 2020.

Which employees are eligible for overtime in 2020?

The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek.

However, Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain computer employees. These exemptions are often called the “white-collar” or “EAP” exemptions. To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than $684 per week. Job titles do not determine exempt status. In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department’s regulations.

Once implemented, the minimum annual salary threshold for the “white-collar” exemption will be $35,568, increasing eligibility for an additional 1.2 million more workers. Currently the threshold for the exemption applied to white collar workers making at least $23,000 annually.

The result will be that employees making less than $35,568 (as opposed to only $23,000), even if salaried, will be entitled to overtime pay.   The adjustment by the Department of Labor is aimed at increasing overall compensation in the work force by increasing the number of workers eligible for overtime pay and also increasing the minimum salary required for employers to take advantage of the “white collar” exception.   

What employees are exempt from overtime pay?

Employers must reevaluate employees, currently exempt, who are earning an annual salary under or slightly over the new threshold. To be given a “white-collar” exemption, there are tests. 

Executive exemption

The employee’s primary duty must be managing the enterprise or a department or subdivision of the enterprise. The employee must customarily and regularly direct the work of at least two employees and have the authority to hire or fire workers (or the employee’s suggestions and recommendations as to hiring, firing or changing the status of other employees must be given particular weight).

Administrative exemption

The employee’s primary duty must be office or non-manual work that is directly related to the management or general business operations of the employer or the employer’s customers. The employee’s primary duty also must include the exercise of discretion and independent judgment with respect to matters of significance.

Professional exemption

The employee’s primary duty must be work requiring advanced knowledge in a field of science or learning that is customarily acquired by prolonged, specialized, intellectual instruction and study.

Training needed for employers and employees

Employees in the pay gap between the current pay threshold of $23,000 and the new limit of $35,538 may not be tracking their work time. Under the new plan, all work time and overtime must be tracked. For employers, this may mean training for affected employees on time-keeping procedures.

Both employers and employees need awareness training on other features of the plan. Employers may count up to 10% of annual non-discretionary bonuses, incentives, and commissions toward an employee’s salary – sometimes bumping them above the $35,538 threshold and disqualifying them from overtime.

Employers may restructure by increasing the salary of some and reclassifying others to nonexempt. They may also create ways to limit overtime hours – especially for the newly nonexempt employees who are not familiar with tracking hours.

This will take some time for both sides to adapt to the new rules, but awareness of the rules and how they apply to your particular situation, will go a long way toward a smoother transition and less frustration. The timing of the new rule gives everyone three months to adjust and be ready for the new year.

In 2016, the Department of Labor under the Obama Administration previously set an even higher minimum salary requirement to qualify for one of the white collar exemptions.  The $47,476.00 minimum requirement established by the Obama Department of Labor would have protected even more workers (an estimated 4.2 million) by dramatically increasing the number of workers eligible for overtime pay and significantly increasing the minimum salary required for white collar exemptions from the overtime pay requirement.  

However, a US District Court ruling stopped implementation of the 2016 rule before it became final.   During the pendency of the appeal, the Department of Labor under the Trump administration decided to dismiss the appeal previously initiated by the Obama Department of Labor – thus ending final implementation of the even higher salary threshold.

Nevertheless, the current Department of Labor has made the current rule change to the $35,538 threshold which is an improvement under the previous number established in 2004. Overall, this is good news for both “white collar” exempt employees as well as employees who work over 40 hours as they can be assured they will be more fairly paid for time worked.

The Construction Industry Under the Fair Labor Standards Act (FLSA)

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Businesses involved in the construction industry are engaged in the activities of new construction or reconstruction. The repair or renovation of existing commercial and/or residential structures, as well as roadway and bridge construction, are also a part of this industry. The following work activities are included in the construction industry: painting, sandblasting, tuckpointing, roofing, guttering, spouting, water well drilling, installation of flooring and landscaping. 

Requirements for construction industry 

Employers who are covered under the FLSA must comply with the recordkeeping requirements of Regulations, 29 CFR Part 516.

Also, an employer must establish a workweek (7 consecutive 24-hour periods) and must pay overtime when hours worked exceed 40 in the workweek. The practice of paying overtime only after 80 hours in a bi-weekly pay period is illegal since each workweek must stand alone. 

For non-exempt employees, covered employers must pay the Federal minimum wage and time and one half the regular rate of pay for time worked over 40 hours in a workweek. These businesses must also be aware of the potential for violations of the youth employment requirements of the FLSA. This is especially critical due to the dangerous nature of both the work performed and the tools used in this industry.

If the employer performs work on a federally financed project or a project in which the Federal government has provided assistance in financing the project, a different and somewhat stricter set of labor standards applies. Typically, this would require that employees performing on such contracts be paid a “prevailing wage rate”.

Youth Minimum Wage: The 1996 Amendments to the FLSA allow employers to pay a youth minimum wage of not less than $4.25 an hour to employees who are under 20 years of age during the first 90 consecutive calendar days after initial employment by their employer. The law contains certain protections for employees that prohibit employers from displacing any employee in order to hire someone at the youth minimum wage.

Typical Problems

(1) Failure to record all hours actually worked to include time spent working before or after the shift. (2) Shorting of hours by using terms such as down time or rain delay. (3) Failure to compensate for meal breaks where the employee is not completely relieved of all duties to enjoy uninterrupted time for the meal. (4) “Banking” of overtime hours or payment of overtime in the form of “comp time”. (5) Failure to combine the hours worked for overtime purposes by an employee in more than one job classification for the same employer within the same workweek. (6) Failure to segregate and pay overtime hours on a workweek basis when employees are paid on a bi-weekly or semi-monthly basis. (7) Failure to pay for travel from shop to work-site and back. 

Other Pertinent Labor Laws

(1) The Immigration Reform and Control Act requires employers to complete and maintain I-9 forms to verify the employment eligibility of all individuals hired after November 6, 1986. (2) The Wage Garnishment Law limits the amount of an individual’s income that may be garnished and prohibits firing an employee whose pay is garnished for a single debt. (3) The Employee Polygraph Protection Act prohibits most private employers from using any type of lie detector test either for pre-employment screening or during the course of employment. (4) The Family and Medical Leave Act requires covered employers to provide eligible employees up to 12 weeks of unpaid, job-protected leave each year for specified family and medical reasons. (5) The Davis-Bacon and Related Acts require payment of prevailing wages on federally funded or assisted construction projects.