Employers are routinely challenged in navigating the U.S. Department of Labor's (DOL) test to determine independent contractor status of workers under the federal wage and hour laws. Employers regularly retain workers as independent contractors to whom employers are not obligated to pay overtime or minimum wage. As such, those employers would benefit from a clear and easily applied test to determine contractor status.
The DOL historically has applied to so-called six-factor “economic realities” test developed through federal case law, but had not issued regulations adopting or affirming the use of this test, until now.
For the first time, the DOL has issued final federal regulations establishing an independent contractor test. The DOL's final rule is intended to “streamline and clarify” the independent contractor test to make it easier for employers to identify which workers qualify for independent contractor status.
The DOL's final rule affirms the use of the “economic reality” test to determine contractor status. The ultimate question is whether the individual's work is in business of the individual or economically dependent on the employer. Any determination depends entirely on the specific facts of the worker's engagement; however, the final rule does provide a more defined framework for evaluating the reality of the worker's status by focusing on five factors:
- The nature and degree of control over the work;
- The worker's opportunity for profit or loss based on initiative and/or investment;
- The amount of skill required for the work;
- The degree of permanence in the working relationship between the worker and the potential employer; and
- Whether the work is part of an integrated unit of production.
The first two factors are considered “core factors”, which are most probative of contractor status. If these two factors point toward the same classification, whether employer or contractor, there is a substantial likelihood that the classification is accurate. The other three factors are intended to serve as additional guideposts in the analysis, particularly when the two core factors do not point to the same classification.
In addition, the actual practice of the relationship between employer and worker is more relevant than what terms are included in any independent contractor agreement. This means that it will be important for any independent contractor agreement to accurately reflect the terms and conditions of the relationship, and avoid items that do not actually apply to the work performed.
The DOL also included six short examples for further instruction, each analyzing only one factor of the test under specific facts from various industries: (1) the control factor in the context of the trucking industry; (2) the opportunity for profit and loss in the gig economy; (3) the opportunity for profit and loss in the construction industry; (4) the permanence of the relationship in the seasonal hospitality industry, and (5) and (6) the integrated unit factor in journalism, with one example of independent contractor and the other of employee status.
Although the new rule is to take effect on March 8, 2021, the incoming Biden administration has signaled the potential to “freeze” the rule and will likely issue a new proposed rule. Therefore, we will need to wait and see whether employers will be able to benefit from the DOL's first ever independent contractor regulation.
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