Employee or Independent Contractor? Department of Labor Will Keep “Economic Reality” Test

The federal Department of Labor announced this week that it would withdraw a rule change proposed by the previous administration that would have made it easier for employers to classify a worker as an “independent contractor” under the Fair Labor Standards Act. This law guarantees an employee’s right to be paid minimum and overtime wages.

Employee vs Contractor Status – A Significant Difference for Workers

A worker’s status as an “employee” or an “independent contractor” has a significant impact on their rights, including wage and hour protections, worker’s compensation, unemployment insurance, and protection from employment discrimination. Generally, an employee is granted more legal protections and entitlements than an independent contractor. However, a worker’s status applies differently in each area of employment law, and each law involve different tests.

With the increase of positions in the “gig economy,” such as rideshare or delivery companies, the question of whether a worker is entitled to “employee” protections has been an important subject of legislation. The CARES Act provided some unemployment insurance benefits to independent contractors, a group historically ineligible for such benefits. Recent debate over a new California law concerning the classification of employees has also brought more attention to this important subject.

“Economic Reality” of Relationship Between Workers & Businesses

The standard for determining whether a worker is an “employee” entitled to minimum and overtime wage protections is called the “economic realities test.” This test intends to determine whether the worker is economically dependent on the business, which would suggest they are an employee. On the other hand, if the worker is truly in business for themselves, they may be properly considered an independent contractor.

The economic realities test is a “balancing” test that looks at six factors:
(1) How much control does the employer have over the employee’s work?
(2) Does the worker have an opportunity to earn more or less money based on how they manage their work?
(3) Does the worker own or invest in the equipment required to perform the work?
(4) Does the work performed require a special skill?
(5) Is this a long-term or permanent working relationship, or a short-term, temporary relationship?
(6) How integral, or central, is the task performed by the worker to the business?

Employees Cannot Sign Away Rights of Employee Status

One important note: The fact that a business requires workers to sign an agreement saying they are independent contractors does not settle this issue. A worker cannot agree to give up their rights under the Fair Labor Standards Act or other employment laws.

What matters is if the workers meet the requirements for being considered an “employee” under the “economic realities” six-factor test. So even if you have signed a contract stating you are an “independent contractor,” if the economic realities suggest you are an employee, you are still entitled to the legal protections for every employee.

New California Law Simplifies Employee vs Contractor Test

The proper test for classifying workers as “employees” has gotten significant attention of late. First, the state of California passed a simplified test to determine whether a worker is an independent contractor, looking at just 3 factors:

(1) Is the worker free from control and direction of the hirer in connection with the performance of the work?

(2) Does the worker perform work outside the usual course of the hiring entity’s business?

(3) Is the worker customarily engaged in an independently established trade, occupation, or business?

But after the passage of this test, certain gig economy companies like Uber, Lyft, and Doordash pushed for a ballot initiative that would exempt workers for app-based transportation and delivery companies from being considered “employees.” These businesses had to provide some protections to those workers, though not the full protections to which those workers would have been entitled if they were considered “employees.”

Department of Labor Reverses Course on Changing Independent Contractor Test

Similar debates about the proper test for classifying employees continue at the federal level. In January 2021, the Trump administration released a new rule that would have made it easier to classify a worker as an independent contractor by focusing on fewer factors in the “economic realities” test. But on May 6, 2021, the Department of Labor issued a final rule withdrawing the previous change, concluding the new test was counter to the FLSA goal of protecting workers from substandard wages and oppressive working hours. The secretary of labor, Marty Walsh, expressed a view that “in a lot of cases gig workers should be classified as employees.”

Gig Workers and Independent Contractors Can Consult an Employment Attorney for Counsel

As the “gig economy” continues to employ more workers, this question will only become more important. If you are classified as an independent contractor and have questions about whether you are being fairly compensated under the law, please contact our experienced wage and hour attorneys for a consultation.

Caitlin Madden
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