On September 22nd, the U.S. Department of Labor, (DOL) issued a proposed rule that would re-write the process by which a worker is determined to be an employee or independent contractor. The proposed rule, (which will be open for thirty days of public comments once published in the Federal Register) will use an updated “economic reality” test to determine an individual’s status as an individual who is in business for themselves or as someone who is economically dependent on another business and therefore an employee of that business.
The current process used to determine the status of a worker also relies on a similar test, but considers more factors, the proposed rule will emphasize two factors, calling them core factors. The two core factors under the new test are:
- The nature and degree of the worker’s control over the work.
- The worker’s opportunity for profit or loss based on initiative or investment.
The test would also consider three other factors that may provide additional guidance on the decision:
- The amount of skill required for the work.
- The degree of permanence of the working relationship between the worker and the potential employer.
- Whether the work is part of an integrated unit of production.
Unlike the existing Economic Reality Test where no particular factor is given more weight than the others, under the new test the two core factors are entitled to greater weight than the other factors. According to the DOL, if control and opportunity for profit or loss point toward the same classification, their combined weight is substantially likely to outweigh the other factors.
The DOL has also provided further guidance on how to apply the factors, for example, in the control factor, they do not consider requirements that an individual comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards to constitute control as these are common contractual requirements.
If finalized, the new rule may face legal challenges as it will likely make it easier to classify workers as independent contractors. Furthermore, the new rule does not preempt state-based rules, such as the ABC test in California, which make it more difficult to classify a worker as an independent contractor.
About the Authors. This update was prepared by HR Pros, LLC, a national HR consulting firm that helps companies reduce operational and employment related risks. Contact Christopher Brown (cbrown@hrpros.biz), Philip Roach (philipcr@hrpros.biz) or Josh Blinkey (jblinkey@hrpros.biz) for more information.
The information provided in this update is not, is not intended to be, and shall not be construed to be, the provision of tax or legal advice, nor does it necessarily reflect the opinions of HR Pros, LLC or our clients. The content is intended as a general overview of the subject matter covered. HR Pros, LLC is not obligated to provide updates on the information presented herein. Those reading this alert are encouraged to seek direct counsel on tax or legal questions.
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