On May 5th, the Department of Labor took action to withdraw the so-called “Independent Contractor Rule” promulgated by Secretary of Labor Acosta during the Trump administration. What rule is that, you ask? To be precise, the rule we are discussing involves the application of the minimum wage and hourly overtime law contained in the Fair Labor Standards Act.
The way such a rule is interpreted and enforced therefore has a strong impact on small business struggling with the decision as to who they will make employees and who they will make contractors. In a post-COVID environment where businesses are still struggling to get back on their feet, paying even one or two hours of overtime where one could use a contractor instead could mean the difference between survival and failure. And if the Biden Administration and a democratic congress make good on their vow to raise the minimum wage as well, the independent contractor-employee dichotomy has even more riding on it.
Under the Trump administration, the decision on whether a worker was an employee or an independent contractor hinged primarily on two “core” factors: (i) the nature and degree of control over the work, and (ii) the worker’s opportunity for profit or loss. Generally speaking, the more control an employer had over details of the work—particularly work of a professional or non-discretionary nature— the more weight is placed on the employer side of the scale.
Likewise, the more “skin” a worker has in the game, so that his economic welfare is tied to the company’s actual profits and losses, the more likely he would be deemed an employee as opposed to an independent contractor. While there were other factors in play under the Trump DOL’s scheme (called “guiding factors”) these two were far and away the most impactful.
Enter the “Economic Realities” Test
Under the Biden Department of Labor, the previous practices of the Department and judicial precedent, re-establishes the following multipart factors: • The permanency of the relationship. • The amount of the alleged contractor's investment in facilities and equipment. • The nature and degree of control by the principal. • The alleged contractor's opportunities for profit and loss. • The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor. • The degree of independent business organization and operation.
The approach of the DOL going forward will be to analyze the “economic realities of the employment relationship” using all six of the stated factors, with no one factor being more important than any other. The “economic realities test” was formulated by two United States Supreme Court decisions handed down on the same day in 1947, and had pretty much been consistently applied by the courts and the DOL until the Trump administration proposed its new rule. In those and similar decisions, the Supreme Court sought to determine which workers as a matter of economic reality are dependent upon the business to which they render service.
The greater the dependence (under the six factors), the greater the likelihood the DOL would find them employees and require the payment of minimum wages and overtime under the FLSA. Lest you think the economic realities test is new, think again. It was always the judicial and administrative status quo, until the Trump administrative proposed a new rule. That proposed new rule will now never take effect.
Practical Effects of the Rule
New or existing employers who have been using large numbers of contractors would do well to have a critical legal review of how much workers each in each job function fall to one side or the other of each of the six factors. Getting it right early could end up being much less expensive than having large numbers of contractors recharacterized as employees later on, and having to pay large amounts of wages, overtime, and/or penalties and interest retroactively