On January 6, 2021, the U.S. Department of Labor (the Department) announced a final rule clarifying the standard for employee versus independent contractor status under the Fair Labor Standards Act (FSLA). The Department is revisiting its interpretation of the independent contractor rules to promote certainty, reduce litigation, and encourage innovation in the economy.
The final rule will become effective on March 8, 2021, and includes the following clarifications:
- Reaffirms 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.
- 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. These factors are not exhaustive, and no single factor is decisive:
- 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.
- In evaluating the individual's economic dependence on the potential employer, the actual practice of the parties involved is more relevant than what may be contractually or theoretically possible. (29 CFR Parts 780, 788 and 795)
When considering employee versus independent contractor analysis under Puerto Rico law, the final rule must be interpreted in conjunction with Act No. 4 of 2017. Act No. 4 creates an incontrovertible presumption that a person is an independent contractor if the following criteria are met:
- The individual has or has requested an employer identification number or employer social security number.
- The individual has filed income tax returns as an independent business or as self-employed.
- The relationship between the parties is through a written contract.
- The individual is contractually required to have licenses or permits issued by the government to operate his business or provide the agreed services.
In addition to having to comply with all four basic requirements, three of the following five criteria must be met by the individual:
- Maintain control and discretion over the way in which the work is performed, except for the necessary control by the principal to ensure compliance with any legal or contractual obligation.
- Maintain control over when the work will be performed unless there is a specific schedule agreement.
- Not be required to work exclusively for the principal unless required by law or in the case of limited time exclusivity agreements.
- Freedom to hire employees to assist in the rendering of the services.
- The individual made an investment to provide the services (e.g., tools, equipment, materials, licenses, or rental).
Act No. 4 specifically provides that unless these very specific requirements are met, no incontrovertible presumption is created, and the determination regarding the independent contractor/employee status should be based on the common law test following the intention of the parties and the degree of control over the work.