How Should Employers Determine Worker Status?

The U.S. Department of Labor (DOL) has withdrawn its “Independent Contractor Rule,” which was set to go into effect on May 6, 2021. The rule was put in place to help employers determine worker status as an independent contractor or employee.

Independent Contractor Rule

In 2020, the DOL put forward regulations that would have provided workers with an “economic reality test” to determine a worker’s status as an independent contractor or a Fair Labor Standards Act (FLSA) employee. The test would have helped employers identify two core factors when classifying individuals as independent contractors, including the nature and degree of control the worker has over his or her work, and the worker’s opportunity for profit or loss based on investment and/or initiative.

The department withdrew the rule for several reasons, including:

• The rule was in tension with the FLSA’s text and purpose, as well as relevant judicial precedent.
• The rule’s prioritization of two core factors for determining employee status under the FLSA would have undermined the longstanding balancing approach of the economic realities test and court decisions requiring a review of the totality of the circumstances related to the employment relationship.
• The rule would have narrowed the facts and considerations comprising the analysis of whether a worker is an employee or an independent contractor, resulting in workers losing FLSA protections.

The FLSA includes provisions that require covered employers to pay employees at least the federal minimum wage for every hour they work and overtime compensation at not less than one-and-one-half times their regular rate of pay for every hour they work over 40 in a workweek. FLSA protections do not apply to independent contractors.

The DOL anticipates that the independent contractor rule’s withdrawal will avoid a reduction in workers’ access to employer-provided fringe benefits such as health insurance and retirement plans. The withdrawal will also avoid a reduction in other benefits such as unemployment insurance and workers’ compensation coverage.

How employers should determine worker status

The U.S. Supreme Court has on several occasions indicated that there is no single rule or test for determining whether an individual is an independent contractor or an employee for purposes of the FLSA. The Court has held that it is the total activity or situation which controls the determination. Among the factors which the Court has considered significant are:

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.
7. The degree of independent business organization and operation.

Help is available

The business attorneys at O’Reilly Rancilio are available to answer your questions regarding employment and independent contractor agreements. For more information, please visit our website or call 586-726-1000.