On January 10, 2024 the Department of Labor (DOL) made their decision to roll back the Independent contractor test to an “economic realities” test. The rule goes into effect on March 11th 2024.
The test aims to help employers and workers determine whether their relationship is categorized as an employee or contractor relationship under the Fair Labor Standards Act (FLSA)
The classification is important because employees have protections and limitations that don’t apply to independent contractors. Incorrect classification can lead to compliance issues for employers.
Independent contractor relationships established after the 2021 rule change should be audited for compliance with the New DOL ruling.
The new independent contractor “economic realities” test
The latest directive from the Department of Labor (DOL) revokes a 2021 rule that emphasized two factors—control over the work and the opportunity for profit or loss. The current rule advocates for a comprehensive evaluation, adopting a totality-of-the-circumstances analysis where no single factor is deemed more significant than the others.
The New Economic Reality Test is not based on two factors but a comprehensive assessment of 6 factors. It considers the totality of circumstances surrounding the working relationship to guide the evaluation.
The Economic Reality Test is a nuanced and extensive methodology that goes beyond a mere technical or common-law approach to control. It focuses on the specific dynamics inherent in the worker-employer relationship. This approach takes into account various elements that interact with each other, providing a more accurate representation of the true nature of the relationship under scrutiny.
The new test looks at these six factors to determine independent contractor status.
- Opportunity for profit or loss depending on managerial skill
- Investments by the worker and the employer
- Permanence of the work relationship
- Nature and degree of control
- Whether the work performed is integral to the employer’s business
- Skill and initiative.
Economic Reality Test Factors
The updated Form I-9 gives employers more flexibility in verifying their employees’ employment eligibility. Qualified employers can inspect their employees’ documentation virtually, removing the need for physical verification.
How do Employers Qualifies for the Virtual Documentation Inspection
1. Opportunity for profit or loss depending on managerial skill : This factor primarily looks at whether a worker can earn profits or suffer losses through their own independent effort and decision making.
Relevant facts include
- whether the worker negotiates their pay
- Decides to accept or decline work
- Hires their own workers
- Purchases material and equipment
- or engages in other efforts to expand a business or secure more work, such as
marketing or advertising.
2. Investments by the worker and the employer : This factor primarily looks at whether the worker makes investments that are capital or entrepreneurial in nature. Investments by a worker that support the growth of a business.
Investments to
- Increasing the number of clients
- Reducing costs
- Extending market reach
- Increasing sales
3. Degree of permanence of the work relationship : This factor primarily looks at the nature and length of the work relationship. Work that is sporadic or project-based with a fixed ending date (or regularly occurring fixed periods of work), where the worker may make a business decision to take on multiple different jobs indicates independent contractor status.
4. Nature and degree of control : This factor primarily looks at the level of control the potential employer has over the performance of the work and the economic aspects of the working relationship.
Relevant facts include whether the potential employer controls
- Hiring
- Firing
- Scheduling
- Prices or pay rates
5. Extent to which the work performed is an integral part of the employer’s business : factor primarily looks at whether the work is critical, necessary, or central to the potential employer’s principal business, which indicates employee status.
6. Skill and initiative : This factor primarily looks at whether the worker uses their own specialized skills together with business planning and effort to perform the work and support or grow a business.
To summarize, the new Economic Reality Test replaces the previous Independent contractor test to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act. The new test is more comprehensive and takes into account a variety of factors to provide a more accurate representation of the worker-employer relationship. This change highlights the importance of correctly classifying workers to avoid compliance issues for employers. It is recommended that employers and workers familiarize themselves with the new test and seek assistance from HR account managers or refer to the DOL ruling and supporting documents if they have any questions or concerns.