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Proper Work Classification

| Jun 17, 2021 | Employment Law |

With President Biden’s election and the change in administration, the U.S. Department of Labor (DOL) is once again examining rules governing classification of workers as independent contractors.  Proper classification of workers as independent contractors, as opposed to employees under the Fair Labor Standards Act (FLSA), is important for a number of reasons.  Contractors are responsible for paying their own taxes and are not subject to minimum wage and overtime protections afforded employees. In addition, they are not eligible for employer sponsored insurance or retirement, do not qualify for unemployment benefits, and are not covered by worker’s compensation.

By way of background information, the DOL announced a final rule on January 6, 2021, to take effect in March 2021, outlining standards to establish independent contractor status.  This rule generally was considered employer friendly.  Had it taken effect, the rule would have reaffirmed the economic reality test.  This determines whether workers truly are in business for themselves and, thus, qualify as independent contractors, or are dependent on an employer, making them employees pursuant to the FLSA.  The rule identified two factors central and most probative to making this determination: (1) the nature and degree of control over the work; and (2) the worker’s opportunity for profit or loss in the venture.  The rule also identified three other factors, particularly when the above two factors are in conflict: (1) the requisite skill involved in the work; (2) the degree of permanency of the relationship; and (3) whether the work is part of an integrated unit of production.

On March 12, 2021, following the election, the DOL issued a Notice of Proposed Rulemaking (NPRM).  After reviewing approximately 1,000 comments, the DOL ultimately withdrew the independent contractor rule on May 5, 2021.  In withdrawing the rule, the DOL questioned whether it was fully aligned with the text of the FLSA and case law interpreting the economic reality test.

Although some conflict exists among the circuits, many courts consider and balance some or all of the following factors in determining independent contractor status: (1) the nature and degree of control over the work; (2) the permanency of the relationship; (3) the skill, initiative, and judgment required for the work; (4) the worker’s investment in requisite equipment and materials; (5) opportunity for profit and loss; (6) whether the work is an integral part of the employer’s business; and (7) the degree of independent business organization and operation.  Courts generally have examined the totality of the circumstances while the new rule would have elevated two of the prongs and made it unlikely the other factors would outweigh them.

During his campaign, President Biden expressed support for a version of California’s more strict ABC law.  This test places the onus of establishing independent contractor status on the business owner/employer.  Under the ABC law, a worker is an employee unless he or she is free from control in terms of performance of the work, both in fact and contractually; performs work outside of the normal scope of the business’ work; and is customarily engaged in an independently established trade, business, or occupation of the same nature as the work being performed for the business owner.

As we wait to see whether the DOL will issue a new rule, the factors outlined in the withdrawn rule continue to be relevant, but not dispositive.  Issues that are immaterial to the analysis include where the work is performed and whether the worker is licensed by the State or local government.  In addition, the absence of an agreement is not determinative nor is labeling the worker as an independent contractor.  Rather, the nature of the actual relationship is central to the evaluation.

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