U.S. Department of Labor Returns to Traditional Economic Realities Test; Trump-Era Rule on Independent Contractors Is Trumped

Return to “Traditional” Economic Realities

Because the DOL has not yet replaced the former rule with a new interpretation, the traditional economic realities test established by judicial precedent will return as the governing standard. As a reminder, this multifactor test consists of an evaluation of the following factors under the totality of circumstances:

1. the extent to which the services rendered are an integral part of the business
2. the permanency of the worker’s relationship to the company
3. the worker’s and employer’s investment in items such as equipment
4. the nature and degree of control by the company
5. the worker’s opportunity for profit and loss
6. whether the work requires special skills and initiative

However, this standard too may be changing again soon. President Biden campaigned on the implementation of a three-prong “ABC” test in his Empower Workers plan and recently emphasized his support for the Protecting the Right to Organize Act of 2021, which includes the ABC test. The ABC test, adopted by certain jurisdictions including California and Massachusetts, states that a worker is an independent contractor only if the individual meets the following criteria: (1) The worker is free from the control and direction of the hiring entity in connection with the work’s performance, both under the contract for the performance of the work and in fact; (2) the worker performs work that is outside the usual course of the hiring entity’s business; and (3) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

What This Means for Employers

With the rules for classification in flux on both a federal and a state level, employers are encouraged to work with counsel to carefully analyze workers to ensure proper classification and take corrective action where needed. Employers should also pay close attention to any new regulations issued in applicable states or by the Biden administration to assure that their contractors meet the correct standard under any newly promulgated laws.

The Sidley Employment Team is available to provide specific, timely guidance.