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The U.S. Department of Labor (DOL) has published its final rule on the classification of workers as either employees or independent contractors (ICs). Under the rule, the DOL returns to the “totality of the circumstances test,” with a focus on workers’ economic dependency on their employers. Why Properly Determining Worker Status Is Important Portable External Media
Whether a worker is considered an employee or an IC is a legal distinction with significant employment ramifications. Employers don’t contribute to workers’ compensation or unemployment insurance for, withhold taxes from, provide benefits to, or comply with federal and state overtime and minimum wage requirements for ICs.
In short, many of the laws designed to protect employees from unfair or even bad acts by employers—such as minimum wage and overtime laws or discrimination in the workplace—don’t apply to ICs.
Yet ICs are an integral part of the nation’s workforce and perform work employers typically wouldn’t ask or expect their employees to do. For example, a retail store wouldn’t expect its employees to resurface its parking lot.
Getting the distinction right is important. Employers that improperly classify employees as ICs can be liable for back payments of workers’ compensation and unemployment insurance and penalized by both the DOL and state agencies. Final Rule Emphasizes Totality of Circumstances
The DOL’s final rule is intended to assist employers in determining when an employee is misclassified as an IC under the Fair Labor Standards Act (FLSA), which governs labor conditions and worker well-being at the federal level. The rule doesn’t include a definition for ICs but rather defines who’s an employee and assumes workers who don’t meet the definition of employee may be properly classified as ICs.
At the core of the determination is economic dependency—that is, the economic reality test: Is the worker economically dependent on the employer for work or in business for themselves and therefore an IC? Some of the factors considered in the test include the opportunity for profit or loss, investment, permanency, control, whether the work is an integral part of the employer’s business, and skill and initiative. Six-Factor Test
The new rule uses six factors to assess the economic realities of the working relationship and the question of economic dependence. Although no single factor or subset of factors is necessarily dispositive, the weight given to each factor may change depending on the facts and circumstances of the particular relationship.
No. 1: Opportunity for profit or loss depending on managerial skill. Elements to be considered under this test include: Whether the worker determines or can meaningfully negotiate the charge or pay for the work provided; Whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed; Whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and Whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space.
If a worker has no opportunity for a profit or loss, then this factor suggests the worker is an employee.
No. 2: Investments by the worker and the potential employer. According to the rule, “investments that are capital or entrepreneurial in nature and thus indicate independent contractor status generally support an independent business and serve a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach.”
No. 3: Degree of permanence of the work relationship. A worker may be an IC when the work relationship is definite in duration, nonexclusive, project-based, or sporadic based on the worker being in business for themselves and marketing their services or labor to multiple entities.
No. 4: Nature and degree of control. This prong of the test considers a wide range of factors, including whether the potential employer sets workers’ schedule, supervises the performance of the work, explicitly limits workers’ ability to work for others, uses technological means to supervise the performance of the work, reserves the right to supervise or discipline workers, or places demands or restrictions on workers that don’t allow them to work for others or work when they choose.
No. 5: Extent to which the work performed is an integral part of the potential employer’s business. This factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the potential employer’s principal business. For example, paving a retail store’s parking lot wouldn’t be considered an integral part of the employer’s business.
No. 6: Skill and initiative. This prong of the test examines whether the worker brings specialized skills to the workplace as opposed to being trained by the potential employer. If the worker’s use of specialized skills is connected to business-like initiative, that could indicate the worker is an IC.
The rule also allows for the consideration of additional factors if the factors in some way indicate whether the worker is in business for themselves as opposed to being economically dependent on the potential employer for work. Bottom Line
Determining whether a worker is properly classified as either an employee or an IC has significant legal consequences under federal and state law. The new rule is intended to guide you in making the correct determination, but you’re wise to consult with legal counsel before committing to a particular treatment.
Dave McCormack is a partner with Axley Brynelson, LLP, in Waukesha, Wisconsin. He can be reached at dmccormack@axley.com.
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