On December 30, 2020 The Department of Labor (DOL) announced a new regulation regarding the status of employment, in particular, how to determine whether an individual classifies as an independent contractor or an employee of a business. The rule was not to go into effect until March 8, 2021 pending publication in the Federal Register. However, on January 20, 2021 the Biden Administration took over the White House and effectively added a 30 day freeze on the rule.
The DOL rule set out to create criteria on defining the employment classification of individuals. This works to determine the economic reality or economic dependency an individual has on a hiring entity. If an individual is economically dependent on the hiring entity then they will be considered an employee or if they are economically independent thus in the business for themselves they would be considered an independent contractor under the Fair Labor Standards Act.
The DOL set five factors to determine the economic reality of an individual. These factors are:
- The Nature And Degree Of The Individual’s Control Over The Work
Employee: If an individual must meet health and safety standards, comply with legal obligations, fulfil deadlines, comply with quality control standards and adhere to other contractual requirements determined by a business.
Independent contractor: If the control is in the hands of the individual when it comes to setting schedules, selecting projects and working for others.
- The Individual’s Opportunity For Profit Or Loss
Employee: If an individual must work more hours or work more efficiently to earn more or positively impact their earnings.
Independent contractor: If an individual has control over the initiative set to increase earnings or incur losses including the control over the capital expenditure on equipment and material necessary for the task.
- The Amount Of Skill Required For The Work
Employee: If the individual is dependent on the hiring entity to provide the required skills and training to complete work.
Independent contractor: If the hiring entity does not offer the necessary specialized skills or training for the individual to complete tasks.
- The Degree Of Permanence Of The Working Relationship
Employee: The work is indefinite and continuous in duration.
Independent contractor: The duration is definite and random in nature, excluding seasonal work.
- Whether The Work Is Part Of An Integrated Unit Of Production
Employee: If the individual’s tasks are integrated into the production process for the hiring entity’s goods or services.
Independent contractor: If the production process of the hiring entity is separate from the work done by the individual.
The Biden administration plans to reevaluate the proposed regulations and rework the rules to include an economic reality test that mirrors that of the ABC test implemented by the state of California to classify workers and establish a federal standard for employment statuses of workers.