• The HR Specialist - Print Newsletter
  • HR Specialist: Employment Law
  • The HR LAW Weekly
  • The HR Weekly
  • California Employment Law
  • New York Employment Law
  • Texas Employment Law

Deciding contractor status reverts to 6-factor test

08/22/2017

When Labor Secretary Alex Acosta earlier this year announced that the Department of Labor was rescinding Obama administration guidance on independent contractor misclassification, that was good news for employers. Relaxing the DOL’s enforcement stance means companies now have greater flexibility to engage outside labor without fear they will be charged with trying to dodge minimum wage or overtime rules.

The decision means declaring who is an independent contractor and who is an employee again relies on a relatively simple six-part test—endorsed by the U.S. Supreme Court—that guided DOL enforcement for decades. Gone is a more cumbersome, Internal Revenue Service-approved 20-step standard.

The new/old test has important implications for hiring outside talent in today’s evolving gig economy, where workers and employers alike seek the flexibility to form and disband working relationships with relative ease.

Obama-era rule rescinded

The Obama administration’s Department of Labor issued Administrator’s Interpretation No. 2015-1 in 2015. In doing so, it declared that increasing use of independent contractors instead of employees was a “problematic trend.” To limit the practice, the guidance proposed a broad enforcement test that would have found most workers classified as employees if they were at all economically dependent on a particular organization.

Traditionally, an employing organization’s control over workers has been the lynchpin for employee status.

The 2015 DOL guidance changed that by stressing workers’ economic dependence on an employing organization, rather than the control it exerted over their work. The traditional six factors could be used as guides to answer the question of economic dependence, but no single factor, including control, should be overemphasized.

At the time, business groups argued that the guidance would generate more lawsuits.

The six-factor test

On June 7, the DOL withdrew Administrator’s Interpretation No. 2015-1. As a result, the old six-factor economic reality test is back in effect.

Note: The DOL has yet to revise its field operations handbook—the investigator’s handbook—to reflect the old test for workers’ status. Employers are still legally bound by the classification provisions of the Fair Labor Standards Act. However, it is clear that by pulling back the guidance, the Trump administration is signaling a more tolerant enforcement scheme.

The traditional six factors were developed by the Supreme Court decades ago. They are:

1. The extent to which the services rendered are an integral part of the employer’s business

2. The permanency of the relationship between the employer and the worker

3. The amount the worker invests in facilities and equipment

4. The nature and degree of control asserted over the worker by the employer

5. The worker’s opportunity for profit and loss

6. The amount of initiative, judgment or foresight in open-market competition with others required for the worker’s success.

ABCs of the gig economy

If you use freelancers and other contract workers, you know how complex those relationships can be. As the gig economy continues to grow, worker classification issues will continue to confound. The problem: Different tests apply to workers’ status, depending on the law.

The easiest employee test for a gig worker to pass is the ABC test. Many states use the ABC test to determine if a former worker is eligible for unemployment insurance benefits. However, it can be used to test status under other laws, such as wage payment laws.

Under the ABC test, workers are considered employees, unless:

  • A: They are free from control in connection with the performance of their services
  • B: Services are performed outside the usual course of the employer’s business, or outside of all the places of the employer’s business
  • C: They are customarily engaged in an independently established trade or business.  

Recent case: The Connecticut Supreme Court recently interpreted part C of the ABC test and ruled employers don’t have to present evidence that workers actually worked for other payers for them to be customarily engaged in an independently established trade or business. This is good news for employers. (Southwest Appraisal Group, LLC v. Administrator, Ct. Sup. Ct., 2017)