The U.S. Labor Department has published a final rule that helps clarify how to distinguish an  "employee" from an "independent contractor" for purposes of the Fair Labor Standards Act. The FLSA is the law that governs an employer’s minimum wage and overtime obligations, among other things. 

The final rule, which takes effect March 8, contains: 

 

• a multifactor test for determining when workers are employees or independent contractors; 

• a clarification that when applying the test, no one factor is conclusive and that the actual practices between workers and employers are more relevant than what is stated contractually or is theoretically possible; and

• six fact-specific examples applying the multifactor test.

The multifactor test is designed to determine whether a worker is economically dependent on a business and is its employee, or whether the worker is self-employed. The test identifies and explains two "core factors" and lists three other factors that are probative to worker classification determinations.

The two core factors are:

• the nature and degree of control over the work; and

• a worker’s opportunity for profit or loss based on initiative and/or investment.

The three other probative factors are:

• the amount of skill required for the work;

• the degree of permanence of the working relationship between a worker and a business; and

• whether the work is part of an integrated unit of production.

 

Caution to dealers: The final rule applies to dealerships with respect to their federal FLSA compliance. It does not necessarily apply to other federal or state laws governing the relationship between dealerships and workers, including federal and state tax laws.

Dealers are advised to work with their attorneys and HR professionals to carefully evaluate those relationships where it is not readily apparent whether workers are employees or independent contractors.