Well…I hate to say I called it but…on May 6, 2021, the U.S. Department of Labor (DOL) issued a final rule at 86 FR 24303, withdrawing the Independent Contractor Status rule issued January 7, 2021. As you may recall, that rule was set to change the test as to whether a worker was an independent contractor or employee. While the DOL previously used the “economic realities” test, the new rule would have used an “economic dependence” test. The new test would have narrowed the definition of “employee”, allowing more individuals to classify as independent contractors. Alas, we are back to where we were with the DOL using the economic realities test.
What is the test, you ask? Well, it is not the same test the IRS uses (confusing, I know), but is based on the concept that there are seven factors to consider:
- The extent to which the services rendered are an integral part of the principal’s business.
- The permanency of the relationship.
- The amount of the alleged contractor’s investment in facilities and equipment.
- The nature and degree of control by the principal.
- The alleged contractor’s opportunities for profit and loss.
- The amount of initiative, judgment, or foresight in open market competition with other required for the success of the claimed independent contractor.
- The degree of independent business organization and operation.
Keep in mind that the following common misconceptions are not sufficient alone (the economic realities test must still be met):
- An employer and worker cannot agree on a classification – if the worker does not meet the criteria, they must be paid as an employee.
- Remote work
- Providing a 1099 (versus W-2)
- State or tax law does not determine FLSA status
- Using an EIN, LLC, etc.
- Executed independent contractor agreement
- Paying in cash, check, etc. to an entity other than the worker
In other words, I’ve said it before – if it looks like a duck, quacks like a duck, the DOL is going to say it’s a duck.