The Department of Labor (DOL) recently made key changes to its rules by rescinding a Trump Administration rule that had simplified the process of classifying workers as independent contractors. In its place, the DOL returned to the previous, complex and flexible “Economic Realities Test” which requires an employer to analyze the totality of the circumstances of an individual’s engagement under the following factors:

• The worker’s opportunity for profit or loss depending on managerial skill;
• The investments by the worker and the employer;
• The degree of the permanence of the work relationship;
• The nature and degree of the employer control;
• The extent to which the work performed is an integral part of the employer’s business; and
• The worker’s use of skill and initiative.

This worker-friendly change will complicate the employee classification process, and employers must prepare for the uncertainty and potential liabilities it will bring.

The “New” Test

Under this newly reimplemented test, employers will be required to undertake a complex analysis focusing on the six factors above to determine whether a worker should be classified as an “employee” or an “independent contractor.” This test generally favors an “employee” finding and requires an employer to decide whether the worker is essentially working for themselves, and thus properly classified as an independent contractor, or dependent on the employer for work, and thus properly classified as an employee.

Previously, under the Trump Administration’s rule, the focus of the analysis centered upon the “core factors” of:

• The nature and degree of control over the work; and
• The worker’s opportunity for profit or loss based on initiative with the remaining factors serving as additional guidance when these core factors did not point to the same classification.

This test favored employers and made an employer’s decision to classify a worker as an independent contractor much easier and more defensible.

Now, however, each of the six factors are to be given equal weight under the totality of the circumstances when determining a worker’s appropriate classification. Employers must juggle these six “realities” of the relationship to form their best guess at a worker’s appropriate classification. Because this totality of the circumstances approach complicates the analysis and provides for multiple interpretations of a worker’s proper classification, employers will find it more difficult to avoid suit for misclassification under federal wage and hour rules. Employers should also note that the new test applies only to the DOL’s interpretation of the Fair Labor Standards Act (FLSA), and they must remain cognizant of state regulations and interpretations of their own state’s wage and hour rules.

What Employers Need to Know

Employees are entitled to protections, like minimum wage guarantees and overtime protections, which independent contractors are not. The new Economic Realities Test gives workers more avenues to challenge their classification and will result in increased litigation for employers—especially those contracting with individuals in gig, freelance, or independent contractor capacities. To limit these potential liabilities and best prepare for the newly complexified classification process, employers should consider the following:

• Analyze your workforce:
  • Determine which workers or categories of workers may now be at risk of being classified as employees and take appropriate actions such as reclassifying them.
• Ensure your policies are up to date:
  • Review your policies, procedures, and handbooks to ensure compliance with the Economic Realities Test.
• Conduct necessary trainings:
  • Ensure that those in human resources and positions with hiring authority are trained on the new test and are up to date on best practices.
• Seek legal counsel:
  • Work with your counsel to ensure compliance with the new rule and to conduct the analyses above to avoid potential errors under this complex standard and the associated liabilities.

If you have any questions regarding worker classification or any other employment-related questions, please contact one of Gray Reed’s Labor & Employment attorneys.