Bye Bye, Economic Realities!

On May 5, 2021, the DOL effectively withdrew the Trump Administration’s independent contractor rule, continuing President Biden’s employee-friendly agenda in the Labor and Employment space. The much discussed “economic realities” test would have shifted the power balance towards employers by making it easier to classify workers as independent contractors and not employees. Employers would have had an increased ability to avoid protections under the FLSA, such as minimum wage, overtime pay and other benefits, by classifying workers as independent contractors. So, where do we stand?

The (Withdrawn) Economic Realities Test

The withdrawn “economic realities” test focused on the following two primary factors: (1) the nature and degree of control over the work; and (2) the worker’s opportunity for profit or loss based on initiative and investment. Three other factors were possible guideposts: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the worker and the potential employer; and (3) whether the work is part of an integral unit of production.

The DOL withdrew the rule in part because focusing on two primary factors undermines the purpose of reviewing a worker’s status based on the totality of the circumstances of the employer/employee relationship. The text and purpose of the FLSA does not align with this rule, providing its own, narrower test for categorizing workers.

The Biden Administration’s Endorsement

President Biden is endorsing the ABC test, but that doesn’t mean much at this point. After waiting four years for the DOL to enact the economic realities test, we can’t be too hopeful this will find traction anytime soon. The ABC test considers a worker an employee unless all three of the following are satisfied:

  • The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work;
  • The worker performs work that is outside the usual course of the hiring entity’s business; and
  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Current Status of the Law

The most vital point to note is the current status of the law. The United States Supreme Court has stated that there is no single test. So, that leaves us with the totality of the circumstances approach. And if we haven’t already listed enough factors…the Supreme Court considers the following as significant:

  1. The extent to which the services rendered are an integral part of the principal’s business;
  2. The permanency of the relationship;
  3. The amount of the alleged contractor’s investment in facilities and equipment;
  4. The nature and degree of control by the principal;
  5. The alleged contractor’s opportunities for profit and loss;
  6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor; and
  7. The degree of independent business organization and operation.

Classifying a worker as an employee or independent contractor is highly fact-specific inquiry. Many states (and the Country of California) have their own standards for independent contractor vs. employee status. In light of the new administration’s employee-friendly directives and ever-changing state laws, employers should strongly consider revisiting their worker classifications and consult an attorney to confirm. A misclassification can result in a world of unnecessary legal trouble.