On September 22, the Department of Labor released a proposal to amend the methodology for classifying a worker as an independent contractor. Whether a worker is classified as either an independent contractor or an employee is a highly significant matter. If a worker is classified as the latter, then that worker is covered by the Fair Labor Standards Act (FLSA), and is eligible for various benefits, including minimum wage, overtime, company-provided insurance, and so forth. Now, under the proposed rule, this classification would depend on a new test – the so-called “economic reality test” – which involves weighing numerous factors. This proposed rule may be particularly impactful in the current economic environment due to the large numbers of workers who have been compelled to work remotely.
In this post, we will clarify the mechanics of the economic reality test in detail. Ultimately, as we will see, the determination is based on a case-by-case analysis, and so each case must be examined independently.
The Economic Reality Test
The so-called “economic reality test,” as proposed by the DOL, consists of five separate factors, and these factors are as follows: (1) the nature and degree of the worker’s control over his or her work (the “control factor”), (2) the worker’s opportunity to turn a profit (or a loss) based on his or her own initiative or investment in the work (the “profit factor”), (3) the level of skill involved in the work, (4) the level of permanence which characterizes the relationship between the worker and employer, and (5) whether the work is part of an integrated production unit or whole.
Among these five factors, there is a hierarchy of importance: the first two factors – the control factor and profit factor – have the highest importance, and are referred to as the “core factors” of the economic reality test analysis. The remaining three factors are considered secondary factors, and therefore have less importance in the analysis.
The basic purpose of the economic reality test is to ascertain the degree to which the worker economically relies on the employer for his or her living. If adopted, this rule would make classifying workers as either independent contractors or employees a simpler and more straightforward matter.
Core Factors vs. Secondary Factors
As mentioned, the economic reality test requires a global assessment involving careful analysis of all relevant factors. However, the core factors outweigh the secondary factors within this global assessment. This means that, if the two core factors point toward a common conclusion, the test will likely point toward that classification, regardless if the secondary factors disagree with that classification.
The first core factor, the control factor, looks at the degree of control over which the worker has over his or her work. This factor will tend to support classification as an independent contractor if the worker has more control over his or her work. Things which may indicate that the worker has substantial control over his or her work are as follows: creating his or her own daily work schedule or routine, picking his or her own assignments, being able to work independently with little supervision, being able to work for potential competitors, and so forth.
The second core factor, the profit factor, will tend to support a classification as an independent contractor if the worker has more and more opportunity for profit. The reasoning behind this is that employees generally do not have this kind of opportunity. For instance, if the worker can profit based on his or her initiative, business acumen, or managerial skill, then this would support and IC classification.
The permanence factor would support a classification as an IC when the work has a finite duration or is performed on a sporadic basis. The integrated production unit factor will tend to support a status as an IC if the worker is part of a team or a process which is essential to the production of a certain good or service. When thinking about this factor, it is useful to consider a computer programmer working on a software production team; in such a scenario, the integrated unit factor would point toward an employee classification.
Contact Trembly Law for More Information
As mentioned, this proposal is not yet a rule, but if it does become a rule, it could make classifying a worker as an independent contractor a much simpler matter. If you need further information on this cutting-edge topic, or you have a case involving an IC classification, please get in touch with the Trembly Law Firm today. Call us at (305) 431-5678 and one of our lawyers will respond in double-quick time.