Employee vs. Independent Contractor under the DOL
In January 2021, very soon after President Joe Biden was inaugurated, the Department of Labor (DOL) withdrew a clarification to the employee vs. independent contractor distinction which was developed during the Trump administration. This proposed clarification was supposed to formally take effect on March 8, 2021. However, after being temporarily paused back in January, the DOL recently announced in May that the proposal has been permanently canceled.
The distinction between an employee and independent contractor carries a number of significant ramifications. When a person is classified as an employee, that person is guaranteed certain benefits under the Fair Labor Standards Act (FLSA). By contrast, independent contractors are not covered by the FLSA, and consequently may not obtain the same benefits. However, independent contractors arguably possess certain advantages.
In this post, we will summarize the proposed clarification which was just abandoned, and then highlight the DOL’s reasoning for doing so. Then, we will reiterate the DOL’s current standard for determining a given worker’s status.
The Economic Reality Test
The proposed clarification utilized an “economic reality” test to determine a given worker’s status. By examining numerous factors, the DOL would determine precisely the degree to which a worker is economically dependent on his or her employer. If a worker were found to be sufficiently economically dependent on his or her employer, then that worker would be classified as an employee. The economic reality test relied on 5 factors – 2 primary factors, and 3 secondary factors. The primary factors were the given worker’s level of control over his or her work, and the worker’s opportunity for profit (and loss) depending on his or her investment.
The secondary factors were as follows: (1) the level of skill involved in the work, (2) the level of permanence in the worker/employer relationship, and (3) whether the work is part of an integrated whole.
Reasoning of the DOL
In permanently withdrawing this new proposal, the DOL stated that its reasoning rested on its opinion that this clarification runs afoul of the text and purpose of the FLSA. Moreover, the DOL felt that the older standard (of economic reality based on the “totality of the circumstances’) more accurately characterized the relationship between employers and workers. Finally, under the proposed clarification, the DOL believed that this narrow interpretation would have reduced the number of workers who have employee status, and would thereby reduce the protections of the FLSA.
Current Rule: Totality of the Circumstances
Rather than this new economic realities test, the DOL uses the long-established “totality of the circumstances” test. This older test accounts for all the relevant facts and circumstances of a given situation, not just the 5 factors identified in the proposed clarification. For a full treatment of this older test, we would need to examine previous cases in which this test was used. For now, readers should know that an independent contractor is a self-employed worker who has the ability to offer services to multiple companies, executes an independent contract with an employer, and has a degree of control over his or her work schedule.
Contact the Davidson Law Firm for More Information
In edge cases, the determination of whether a given worker falls into either one of these categories can be difficult. To learn more, or if you are an employer who has a current issue, get in touch with the Davidson Law Firm today by calling 501-374-9977.