Contractor vs. Employee

Independent contractor or employee?

This question is the labor and employment version of which came first – the chicken or the egg?

The U.S. Department of Labor just issued its rule attempting to answer this question at 29 CFR Part 795.  See https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking for information.  The new rule has a messy history and is the subject of one current and several threatened lawsuits.

The USDOL says that the economic dependence of a worker upon a potential employer is the ultimate inquiry.  The Agency has returned to the Economic Realities Test to differentiate the contractor from the employee and has listed six, non-exhaustive, factors to consider in the totality of the circumstances:

1.      The opportunity of the worker for profit or loss depending upon that worker’s managerial skill.  The independent contractor really needs to be in business.

2.      The investments by the worker and the potential employer – tools and equipment purchased by the worker as required by the potential employer are not enough.

3.      The degree of permanence of the work relationship – an open-ended relationship shows employment.

4.      The nature and degree of control by the potential employer over the worker.  This factor is similar to that used by the I.R.S. and the National Labor Relations Board.

5.      The extent to which the work performed by the worker is an integral part of the potential employer’s business.  This is probably the most difficult factor for an employer to justify independent contractor status for a worker.

6.      The skill and initiative of the worker.

The USDOL also has a seventh factor – a “catch-all” for other yet to be named factors which may help separate the contractor from the employee.  Some of the legal challenges may focus on this seventh “mystery factor.”

Congress also is interested in this new rule.  Administrative rules can be overturned by the Congressional Review Act.  A court challenge is already underway in federal court in Georgia.

The rule goes into effect March 11, 2024….unless a judge blocks it.  Stay tuned.