There’s a New (Old) Rule for Identifying Independent Contractors

“Everything old is new again.”

That pretty much sums up the Department of Labor’s latest move to inform the business community regarding the differences between employees and independent contractors.

The hot potato that is the difference between independent contractors and employees has been tossed around for the better part of the last 15 years. During the Obama administration, the federal government adopted the totality of circumstances test, examining the relationship between contractors and the hiring company to decide whether the person is legally an employee and should be treated as such for wage and hour purposes (the IRS employs its own test for taxation, which the DOL has no control over). In doing so, the Obama administration kicked aside the economic realities test which was more favorable to the business community and weighed heavily the nature of the business’s control over its contractor to determine whether it was an independent or employee relationship. Many courts have historically ascribed to this totality of circumstances approach, though it is far from universally accepted.

In 2020, the Trump administration sought to undo the Obama approach by issuing regulations making it clear the DOL would apply the business-friendly economic realities test. The Trump rule was set to go into effect in January 2021, but in an unsurprising turn of events, one of the Biden administration’s first actions was to move to halt the Trump rule.

This brings us to today and the DOL’s proposal to rescind the Trump rule and reimpose the analytical framework of the Obama era totality of circumstances.

What does the new rule do?

If approved, the new rule would rescind the employer-friendly analytical framework and revert the DOL’s approach away from the “economic realities” test back to the six-step “totality of the circumstances” test for classifying workers, which includes the following factors:

• Opportunity for profit and loss;
•  Investment by the worker and employer;
• Degree of performance of the working relationship;
•  Nature or degree of control;
• The extent to which the work is integral to the employer’s business; and
•  Degree of skill and initiative the worker exhibits.

Why does this matter to employers?

Simply put, it will be harder to classify workers as independent contractors. If your business is using independent contractors, you should review the relationships against these six factors objectively to determine whether they are being properly classified as contractors. No one factor is more important than any other, so it is critical to examine each factor against your situation.

We anticipate there may be changes and, at a minimum, lawsuits to put a stop to the DOL implementing this new rule. So long as businesses continue to use contractors to perform work for the company the debate over the proper method of analyzing the employer-employee relationship will continue.

Thompson Coe and myHRgenius Tip of the Week is not intended as a solicitation, does not constitute legal advice, and does not establish an attorney-client relationship.