Towards the end of President Trump’s term, the US Department of Labor (“DOL”) issued a new rule to determine the difference between “employees” and “independent contractors” under the Fair Labor Standards Act (“FLSA”) . This is an important distinction because the FLSA provides various protections for employees, including establishing minimum wage and overtime requirements, which do not apply to independent contractors. Many in the business community have hailed this direction as an effort to streamline the existing federal worker classification test, as well as an effort to standardize the patchwork of different worker classification tests adopted by state agencies across the board. the country.
The rule of the Trump era would have focused the investigation on the assessment of two “essential” factors: (i) the nature and degree of control over the work, and (ii) the possibility for the worker to make a profit. or losses. In essence, the rule would have made these determining factors and would have made the other traditional factors (discussed below) simply “directive”.
On May 5, 2021, under a new Biden administration, the DOL reversed course and officially withdrew this rule before it went into effect. In doing so, the DOL ad that the proposed rule “was at odds with the text and purpose of the FLSA, as well as with relevant case law”.
With this reversal, the DOL confirmed that its advice to determine independent contractor status will remain in effect, and that any independent contractor determination should be guided by the existing test of “economic realities”.
What is the economic realities test?
The economic realities test is the current test to determine whether a worker is to be considered an independent contractor or an employee for the purposes of the FLSA. The test has been interpreted by the DOL and various courts to assess the following factors:
- The extent to which the services rendered are an integral part of the principal’s business.
- The permanence of the relationship.
- The amount of the alleged contractor’s investment in plant and equipment.
- The nature and degree of control exercised by the principal.
- Opportunities for profit and loss of the alleged entrepreneur.
- The degree of initiative, judgment or forethought in free market competition with others required for the success of the claimed independent entrepreneur.
- The degree of independent organization and operation of the enterprise.
As these factors demonstrate, the economic realities test is very fact specific and will depend on various circumstances. Of course, this can lead to a wide variety of outcomes depending on which court or body assesses the factors and makes the decision.
Employers should also not forget about the many tests and rules specific to independent contractors that may apply to them and / or their workers. For example, many states such as New Jersey, California and Illinois have the more employee-friendly “ABC test”. Therefore, care should be taken to assess worker classification issues under existing federal and state laws.