In January 2021, during the last days of the Trump administration, the U.S. Department of Labor (DOL) issued a “final rule,” to become effective in March of this year, changing the decades-longstanding independent contractor test under the Fair Labor Standards Act (“FLSA”). Under the proposed standard a “two core factor” test was to be applied, which would have narrowed the considerations for exclusion of workers from FLSA coverage as “independent contractors.”
However, on March 12, 2021, the DOL under President Biden announced proposed rulemaking, in effect blocking implementation of the Trump rule. On May 5, 2021, the Department announced a final rule withdrawing the proposed new rule, which the DOL characterized as overly employer-friendly, inconsistent with the purpose of the FLSA, and disruptive to the settled law. Of note, the principal deputy administrator for the DOL Wage and Hour Division stated: “When it comes to digital workers … we want to make sure that we continue to look at their needs, how they are interacting with their individual employers and whether or not they have the protections of the Fair Labor Standards Act.”.
Independent Contractor Test Under the FLSA
The net effect of these maneuverings is that the prior “economic reality” test remains in place without change. This means that the previous guidance from the DOL using a six-factor balancing test, based on Supreme Court precedent, will still be used to determine a worker’s classification. The six factors are:
- The nature and degree of the employer’s control;
- The permanency of the worker’s relationship with the employer;
- Whether the worker, or the employer, provides the means and instrumentalities of the work, such as investment in facilities, equipment, or assistants;
- The amount of skill, initiative, judgment, or foresight required for the worker’s services;
- Whether the worker is at risk or benefit of profit or loss; and
- The degree of integration of the worker’s services into the employer’s business.
IRS Test Remains Unchanged, Also
The IRS test, by comparison, was not changed during the Trump administration. The IRS you will recall uses the “20-factor” test. The test is comprised of three general categories; behavioral control, financial control and relationship of the parties.
The IRS factors are:
- Degree of direction of work by employer.
- Amount of training required to qualify.
- Degree of integration worker’s duties into business.
- Must work be done by worker or can worker contract performance to others?
- Control of assistants.
- Continuance/permanence of relationship.
- Control over schedule.
- Demand for full-time work.
- On-site requirements.
- Order and scheduling of work – dictated by worker or employer?
- Reporting requirements.
- Method of payment.
- Compensation for business or travel expenses.
- Use of tools, instrumentalities, and materials provided by employer.
- Level of investment in employer operations.
- Share in gain or loss.
- Ability to work elsewhere.
- Availability to work for general public.
- Control over discharge.
- Right to terminate
If you have questions about these changes, please contact Dave Houston or your Fraser Trebilcock attorney.
This alert serves as a general summary, and does not constitute legal guidance. All statements made in this article should be verified by counsel retained specifically for that purpose. Please contact us with any specific questions.
Fraser Trebilcock Shareholder Dave Houston has over 40 years of experience representing employers in planning, counseling, and litigating virtually all employment claims and disputes including labor relations (NLRB and MERC), wage and overtime, and employment discrimination, and negotiation of union contracts. He has authored numerous publications regarding employment issues. You can reach him at 517.377.0855 or dhouston@fraserlawfirm.com.