In an effort to avoid the costs and risks associated with the employment relation, contractors and construction managers often prefer to hire workers as “independent contractors” rather than employees. And occasionally, they misclassify workers as independent contractors when legally they are not – often with nasty consequences. (Imagine a contractor who has long treated its workers as independent being ordered to pay them for hundreds of hours of overtime!)
It’s pretty easy to screw this up. The tests for distinguishing one from the other are not uniform among the various state and federal statutes governing employment – the Fair Labor Standards Act (FLSA), which prescribes minimum wage and overtime rules for employees, uses one set of factors; IRS uses another; state workers compensation and unemployment insurance statutes use still different tests (including from each other!); and the common law, focused on traditional agency concepts, yet another. Some of these tests are quite restrictive, making it difficult to classify a worker as an independent contractor.
On January 6, 2021, the U.S. Department of Labor announced a new rule for classifying workers as independent contractors rather than employees for purposes of the FSLA, thus replacing a patchwork of court and administrative opinions on the issue with a comprehensive – and minimally restrictive – test for independent contractor status. Its overarching premise is that “an individual is an employee if he or she is dependent on an employer for work and is an independent contractor if he or she is, as a matter of economic reality, in business for him- or herself.” The “economic reality” test announced by the new regulation (1) identifies and explains two core dependency factors: the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on initiative and/or investment; and (2) identifies three other guideposts in the analysis: the amount of skill required for the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work is part of an integrated unit of production.
The first core factor, the nature and degree of control over the work, weighs in favor of independent contractor status “to the extent the individual, as opposed to the potential employer, exercises substantial control over key aspects of the performance of the work, such as by setting his or her own schedule, by selecting his or her projects, and/or through the ability to work for others, which might include the potential employer's competitors.”
The second core factor, opportunity for profit or loss, weighs in favor of independent contractor status “to the extent the individual has an opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen or judgment) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work.”
This final rule expressly rejects the restrictive “ABC” test adopted by several states – including in New Hampshire for unemployment insurance purposes, as I have previously blogged (#3) – under which a worker must be (A) free from employer control, (B) perform work outside the employer’s business, and (C) be in business for himself/herself in order to be deemed an independent contractor. Because only the Department of Labor’s interpretation of the FLSA is governed by the new rule, state laws are unaffected by it. There is still no universal standard.
The new rule has an effective date of March 8, 2021, which gives the Biden administration some time to decide whether to keep it or scrap it. Business interests like it. Unions hate it. Biden’s nominee for Labor Secretary, Boston mayor Marty Walsh, is a former union official and former leader of Boston’s Building and Construction Trades Council, so it is easy to predict where his sympathies lie. Biden's campaign platform pledged to end misclassificaiton of employees (see Blog #94). The rule is also vulnerable under the Congressional Review Act which allows simple majorities in both the House and Senate to repeal a new regulation within 60 days of its submission or publication. We will know soon enough.
[Update: The regulation has been withdrawn by the Department of Labor, 86 Fed.Reg. 24,303 (May 6, 2021).]
It’s pretty easy to screw this up. The tests for distinguishing one from the other are not uniform among the various state and federal statutes governing employment – the Fair Labor Standards Act (FLSA), which prescribes minimum wage and overtime rules for employees, uses one set of factors; IRS uses another; state workers compensation and unemployment insurance statutes use still different tests (including from each other!); and the common law, focused on traditional agency concepts, yet another. Some of these tests are quite restrictive, making it difficult to classify a worker as an independent contractor.
On January 6, 2021, the U.S. Department of Labor announced a new rule for classifying workers as independent contractors rather than employees for purposes of the FSLA, thus replacing a patchwork of court and administrative opinions on the issue with a comprehensive – and minimally restrictive – test for independent contractor status. Its overarching premise is that “an individual is an employee if he or she is dependent on an employer for work and is an independent contractor if he or she is, as a matter of economic reality, in business for him- or herself.” The “economic reality” test announced by the new regulation (1) identifies and explains two core dependency factors: the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on initiative and/or investment; and (2) identifies three other guideposts in the analysis: the amount of skill required for the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work is part of an integrated unit of production.
The first core factor, the nature and degree of control over the work, weighs in favor of independent contractor status “to the extent the individual, as opposed to the potential employer, exercises substantial control over key aspects of the performance of the work, such as by setting his or her own schedule, by selecting his or her projects, and/or through the ability to work for others, which might include the potential employer's competitors.”
The second core factor, opportunity for profit or loss, weighs in favor of independent contractor status “to the extent the individual has an opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen or judgment) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work.”
This final rule expressly rejects the restrictive “ABC” test adopted by several states – including in New Hampshire for unemployment insurance purposes, as I have previously blogged (#3) – under which a worker must be (A) free from employer control, (B) perform work outside the employer’s business, and (C) be in business for himself/herself in order to be deemed an independent contractor. Because only the Department of Labor’s interpretation of the FLSA is governed by the new rule, state laws are unaffected by it. There is still no universal standard.
The new rule has an effective date of March 8, 2021, which gives the Biden administration some time to decide whether to keep it or scrap it. Business interests like it. Unions hate it. Biden’s nominee for Labor Secretary, Boston mayor Marty Walsh, is a former union official and former leader of Boston’s Building and Construction Trades Council, so it is easy to predict where his sympathies lie. Biden's campaign platform pledged to end misclassificaiton of employees (see Blog #94). The rule is also vulnerable under the Congressional Review Act which allows simple majorities in both the House and Senate to repeal a new regulation within 60 days of its submission or publication. We will know soon enough.
[Update: The regulation has been withdrawn by the Department of Labor, 86 Fed.Reg. 24,303 (May 6, 2021).]
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