Issue No. 7 | July 2021
What’s the Next Test?
Whether a worker is considered an employee, or an independent contractor has always been an important yet technical issue. As a practical matter, employers are often benefited by the flexibility and cost savings offered by the “independent contractor” status while workers benefit from being deemed employees. As just one of many examples, an independent contractor is not subject to the Fair Labor Standards Act’s (FLSA) minimum wage and overtime protections.
For many years, the standard that employers were required to comply with in determining independent contractor status under the FLSA was the multi-factor “economic reality” test. This test focuses on the totality of the circumstances surrounding a worker, and the Department of Labor bases its consideration on seven different factors. Factors include things such as the permanency of the relationship between the worker and business, or the amount of the worker’s investment in facilities and equipment.
The Trump administration implemented a new standard in determining independent contractor status called the “Independent Contractor Rule.” The Independent Contractor Rule included a five-part test for the business community to implement when determining a worker’s status. The first two parts of the test were most significant: 1) the level of control the worker has over his or her own work; and 2) the opportunity for profit or loss due to the worker’s own personal investment.
The Biden administration recently repealed the Trump administration’s Independent Contractor Rule, and reimplemented the seven-factor economic reality test. What is the takeaway from all of this? The return to economic reality test is, in some ways, useful because it is familiar to employers. However, President Biden has noted on several occasions his support of the “ABC” test similar to California’s new independent contractor rule resulting from the Dynamex Operations West, Inc. v. Superior Court decision. Under the “ABC” test, it is presumed all workers are employees instead of contractors, and a worker would have to meet all three of the following factors for a business to properly classify them as an independent contractor:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work;
- The worker performs tasks that are outside the usual course of the hiring entity’s business (i.e., the worker cannot perform the work related to the core service or product the business offers its customers); and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work they are performing.
This standard, similar to tests already existing in Illinois, Massachusetts, and New Jersey, may be implemented nationally should the Biden Administration determine it has the support necessary to implement through administrative regulation or through Congressional legislation. This potential change remains a viable option for implementation and may significantly impact employers.
Sources: Employment law likely to shift under Biden, experts say | A Return to Status Quo: The Biden Administration Withdraws the Trump Administration’s Independent Contractor Rule | Dynamex Operations W. v. Superior Court – 4 Cal. 5th 903, 232 Cal. Rptr. 3d 1, 416 P.3d 1 (2018)
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