DOL Updates Worker Classification Guidelines: What this New Rule Means for Enterprise Organizations and the Independent Professionals they Engage
On January 7, 2021, the United States Department of Labor (DOL) issued its final rule on the status of independent contractors. The new rule goes into effect on March 8, 2021.
The new rule reaffirms the “economic reality” test to determine whether an individual is an independent contractor if s/he is in business for him/herself or is an employee and economically dependent on an employer. The rule identifies two core factors:
- The nature and degree of control over the work.
- The worker’s opportunity for profit or loss based on initiative and/or investment.
These factors are the most probative whether a worker is economically dependent on someone else’s business or is in business for him or herself. If the two core factors do not point to the same classification, the following three factors may serve as additional guideposts. The factors are:
- The amount of skill required for the work.
- The degree of permanence of the working relationship between the worker and the potential employer.
- Whether the work is part of an integrated unit of production.
With respect to how to apply these factors, the new rule says:
The economic reality factors … guide the determination of whether the relationship between an individual and a potential employer is one of economic dependence and therefore whether an individual is properly classified as an employee or independent contractor. These factors are not exhaustive, and no single factor is dispositive. However, the two core factors … are the most probative as to whether or not an individual is an economically dependent “employee,” 29 U.S.C. 203(e)(1), and each therefore typically carries greater weight in the analysis than any other factor. [emphasis added]
The rule says that the factors guide the determination, that these factors are not exhaustive, and no single factor is dispositive, and that the core factors carry greater weight than other factors. The new rule provides guidelines but does not provide an unambiguous test. Courts will still be left to evaluate and weigh the enumerated factors and may consider other factors.
Each Circuit Court has different versions of the economic reality test and one of benefit of the new rule is that is should provide some uniformity and standardization. However, for some Circuits, this new rule is not much of a change. The following chart shows the modest changes for the test in the Fifth Circuit.
|Fifth Circuit Economic Reality Test – 2020||Economic Reality Test – New Rule|
|The degree of control exercised by the alleged employer.||The nature and degree of control over the work.|
|The extent of the relevant investments of the worker and the alleged employer.The degree to which the worker’s opportunity for profit or loss is determined by the alleged employer.||The individual’s opportunity for profit or loss based on initiative and/or investment.|
|The skill and initiative required in performing the job.||The amount of skill required for the work.|
|The permanency of the relationship.||The degree of permanence of the working relationship between the individual and the potential employer.|
|Whether the work is part of an integrated unit of production.|
|Faludi v. U.S. Shale Sols., L.L.C., No. 17-20909 (5th Cir., 2020).|
Other Circuits have different factors that they use to decide if an individual is economically dependent on the potential employer and therefore an employee. The standardization of the factors is strong step forward for the DOL, but it would have been stronger if the DOL worked other federal agencies, such as the IRS, to issue one test for all purposes under federal law.
The prospects for the new rule are uncertain. If there are challenges to the rule, the administration may choose not to defend the rule. Congress, by majority vote, can rescind rules within 60 days of their being published in the Federal Register. Or, the new administration could begin its own rulemaking process and propose and adopt a significantly different rule. Commentators agree that the Biden administration is going to be more employee friendly than the Trump administration, but it is not clear how that will take form in the new administration.
The DOL’s new rule offers one standard list of factors for all courts to consider but still leaves courts evaluating and weighing factors to determine if an individual is an employee or independent contractor. Regardless of its merits or flaws, it is likely that the new Biden administration is going to take a different approach to the classification of workers and the new rule is likely to be rescinded or modified.
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