Whether a worker is classified as an employee or independent contractor is not just legal jargon: the distinction has real implications for employees and employers alike. Under the federal Fair Labor Standards Act (FLSA), employees are entitled to a guaranteed minimum wage, overtime pay, unemployment insurance benefits, and workers compensation. Independent contractors, however, are not entitled to these same benefits, nor are they eligible to join unions or entitled to coverage under worker safety protection regulations. In addition, employers are not responsible for an independent contractor’s benefits or employment taxes. So how does an employer appropriately classify workers?
In January 2021, with two weeks left before a new administration would be sworn in, the U.S. Department of Labor (DOL) issued a “final rule” changing the standard distinguishing employees or independent contractors under the FLSA. However, on May 6, 2021 the DOL withdrew the “Trump-era test,” also known as the “Independent Contractor Rule,” from going into effect as planned. Under that standard, there would have been only two core factors for determining employee status under the FLSA, both of which narrowed the facts and considerations included in the analysis (and, according to the Department, favored the employer). The DOL under President Biden has announced that the Trump rule was inconsistent with the FLSA and would have had a disruptive effect on workers and businesses alike.
While the “Trump rule” is now withdrawn, the DOL has not issued a new rule in its place. This means that the previous guidance from the DOL using the economic realities test consisting of a six-factor balancing test, based on Supreme Court precedent, will still be used to determine a worker’s classification. The six factors include (1) the nature and degree of the potential employer’s control; (2) the permanency of the worker’s relationship with the potential employer; (3) the amount of the worker’s investment in facilities, equipment, or helpers; (4) the amount of skill, initiative, judgment, or foresight required for the worker’s services; (5) the worker’s opportunities for profit or loss; and (6) the extent of integration of the worker’s services into the potential employer’s business. Read additional information about these factors, as well as New York State guidance, here.
While the DOL has not issued a new rule at this time, the Biden administration has expressed support for regulatory and legislative action that would expand the type of workers that are considered employees as opposed to independent contractors. Similar to California’s independent contractor rule, the Biden administration has outlined a federal independent contractor standard called an “ABC” test that the DOL may choose to adopt.
The standard begins with the presumption that the worker is an employee and then goes on to test that presumption under three factors:
- whether the worker is free from the employer’s control over performance of the work;
- whether the work is outside of the hiring party’s line of business, and
- whether the worker is engaged in an independent trade.
All three factors must be met to rebut the presumption and to classify the worker as an independent contractor.
While the three factors considered under Biden’s ABC test are already included in the current analysis, the ABC test is stricter in that it requires all three to be met as opposed to the longstanding “economic realities” approach and judged based on a totality of the circumstances. The ABC test was adopted by the House of Representatives in March via the “Protecting the Right to Organize Act” (PRO), but there is no binding authority of a final rule.
Regardless of whether the new standard becomes legal authority, it is clear the current administration is pushing for a more worker-friendly approach to the independent contractor definition. Whether you are a worker seeking to ensure you receive the benefits to which you are entitled, or an employer needing clarification on how to properly classify workers, please contact us for guidance.