Recently, the U.S. Department of Labor (DOL) announced proposals to withdraw the Independent Contractor Final Rule, stating that the rule would “significantly weaken protections afforded to American workers under the Fair Labor Standards Act.”
Issued on January 7, 2021, the Independent Contractor Final Rule established new standards for employers in determining whether a worker is an employee or independent contractor under the FLSA.
The rule adopted a new “economic reality” test that identified two core factors for determining employment status:
- The nature and degree of the worker’s control over the work, and
- The worker’s opportunity for profit or loss based on initiative and/or investment.
Noting that independent contractors have no FLSA protections, the DOL stated that the agency and the courts have not used this test, and it is not supported by either FLSA language or case law. The DOL also said that the rule would minimize other factors courts traditionally consider, making it less likely that the economic test would establish whether a worker is an employee under the FLSA.
President Biden has pledged to work with Congress on establishing a federal standard for independent contractor classification based on the ABC test used by California and several other states to determine worker status:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed for the company.
An employer would need to establish all three of the above factors in order for a worker to be classified as an independent contractor.
Meaning for churches
With the withdrawal of this Final Rule, more employers – including churches – will be subject to the overtime and minimum wage requirements of the FLSA. Penalties and damages for FLSA violations can be steep:
- A maximum civil monetary penalty of $2,074.
- Back pay damages equal to the amount of unpaid overtime and minimum wage.
- Liquidated damages equal to the amount of any back pay owed.
Workers can seek these damages either through a civil lawsuit or the DOL can assess penalties upon an investigation by the agency’s Wage & Hour Division.
The distinction between a nonexempt employee and an independent contractor has been muddied over the past few years. Provident Law has provided a resource to help employers in Arizona understand when to classify workers as independent contractors. When in doubt, churches should seek legal counsel skilled in employment law.
Provident Law’s nonprofit attorneys can help churches and religious organizations and their boards. We stand ready to counsel and serve churches, charities, and foundations, as well as private schools, colleges, universities, and other types of nonprofit organizations—providing broad transactional and general counsel services in Arizona and surrounding areas. Contact us to learn more.