As is common with a change in President, there are bound to be proposed changes to administrative regulations affecting employers. Such is the case Biden Administration with the Department of Labor (“DOL”) and the test applied to determine whether an individual can be classified as an independent contractor by a company or whether the individual must be classified as an employee.
In a series of cases beginning in the late 1940s, the Supreme Court articulated an “Economic Realities Test” to determine if an individual is economically dependent on the Company for work. The Economic Realities Test consists of reviewing the following factors:
1. What is the Degree of control the company has over the individual;
2. Permanency of relationship between company and individual;
3. Integration of the individual’s work in the business to which he renders service;
4. Skill required by the individual to complete the tasks for company;
5. Investment by the individual in facilities for work; and
6. Opportunity of the individual for profit or loss.
On March 8, 2020, under the Trump administration, the DOL promulgated what it deemed to be “a more business-friendly, stream-lined analysis” of independent contractor/employee relationship which focused on two “core” factors: the nature and degree of control over the work and the worker’s opportunity for profit or risk of loss. This rule did not eliminate the other factors, but deemed the control and profit/loss factors to be more probative of the question of economic dependence.
Seeing a potential for abuse in misclassifying those who might normally be regarded as employees, the Department of Labor, under the Biden administration, proposed a new rule on January 9th which will become effective March 10, 2024. The rule removes emphasis on the two core factors, and returns to the previous test which requires a review of all factors equally and looking at the totality-of-the-circumstances analysis of the six factors above.
The new rule provides further substantive guidance, including:
- The six traditional factors should be considered independently – for example, investment in equipment and facilities is a separate factor from profit/loss opportunity.
- The integration factor means not just whether the work is part of an integrated unit of production, but also whether the work is integral to the employer’s business;
- Traditional forms of in-person, continuous supervision are not required to satisfy the control factor and the actual exercise of control requires only such supervision as the nature of the work requires.
- Analysis of “control” may consider scheduling, remote supervision, price setting, and the ability to work for others.
- Rights reserved by the potential employer, even though unexercised, may be probative of a worker’s economic dependence – for example, if, via service provider agreement, the hiring entity reserves the right to supervise/scrutinize/adjust the worker and/or the work product, but never does so, this may nonetheless strongly influence the behavior of the worker making him/her more economically dependent.
Companies should review their current independent contractor relationships and future potential independent contractor relationships by conducting an analysis utilizing the six factors to determine whether the relationship should be classified as employer/employee.
If you have questions or need assistance in reviewing your independent contractor relationships, contact Beckman Lawson’s employment law team, Gary Johnson, Matt Elliott, Craig Patterson, Mark Bloom, and Megan Torres at 260-422-0800.