Near the end of President Trump’s term in office, the U.S. Department of Labor (“DOL”) issued a new rule for determining 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 setting minimum wage and overtime requirements -- that do not apply to independent contractors. Many in the business community welcomed that guidance as an effort to streamline the existing federal worker classification test, as well as an effort to bring some standardization to the patchwork of differing worker classification tests adopted by state agencies around the country.
The Trump-era rule would have focused the inquiry on evaluating two “core” factors: (i) the nature and degree of control over the work, and (ii) the worker’s opportunity for profit or loss. Essentially, the rule would have made these factors dispositive, and would have rendered the other traditional factors (discussed below) merely “guiding.”
On May 5, 2021, under a new Biden Administration, the DOL reversed course and officially withdrew this rule before it ever went into effect. In doing so, the DOL announced that the proposed rule “was in tension with the FLSA’s text and purpose, as well as relevant judicial precedent.”
With this reversal, the DOL has confirmed that its current guidance for determining independent contractor status will remain in effect, and that any independent contractor determination should be guided by the existing “economic realities” test.
What is the Economic Realities Test?
The economic realities test is the current test for determining whether a worker should be considered an independent contractor or an employee for purposes of the FLSA. The test has been interpreted by the DOL and various courts, as evaluating the following factors:
- The extent to which the services rendered are an integral part of the principal's business.
- The permanency of the relationship.
- The amount of the alleged contractor's investment in facilities and equipment.
- The nature and degree of control by the principal.
- The alleged contractor's opportunities for profit and loss.
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
- The degree of independent business organization and operation.
As these factors demonstrate, the economic realities test is highly fact-specific, and will depend on a variety of different circumstances. Of course, this can lead to a wide variety of results depending on a court or agency weighing the factors and making the determination.
Employers should also not forget the many state-specific independent contractor tests and rules that may apply to them and/or their workers. For example, many states such as New Jersey, California and Illinois apply the more employee-friendly “ABC test.” Therefore, care must be taken to evaluate worker classification issues under both existing federal and state laws.