There has always been controversy over classifying independent contractors. Independent contractors provide an economic advantage to companies because companies do not have to provide benefits, pay minimum wage, or pay for overtime hours.
The use of independent contractors is prevalent, especially for workers in the gig economy. The trucking industry has historically used independent contractors for interstate trucking, and Uber and Lyft use independent contractors for their ride-share services.
That may change. The U.S. Department of Labor (DOL) has set forth new worker classifications to identify those workers who should have employee status due to their economic dependence and, therefore, receive benefits and protections as an employee.
A Brief History
The DOL proposed new rule changes in 2022 to prevent the misclassification of workers as independent contractors.
During the Trump Administration, the rules focused on two factors: the degree of control the employer has on the worker and the extent of entrepreneurial opportunity provided by the work. In the Notice of Proposed Rulemaking issued by the DOL, the new rule will repeal the two-factor test.
In 2024, the Biden Administration released the final rule changing how to determine independent contractor status under the Fair Labor Standards Act (FLSA). The rule includes a six-factor economic reality test to determine employee or independent contractor classification based on economic dependence.
The Six-Factor Economic Reality Test
The Department of Labor details a six-factor test in the Employee or Independent Contractor Classification Under the Fair Labor Standards Act. This test can be broken down into the following questions:
1. What is the worker’s opportunity to make a profit or loss? Does the independent contractor have the managerial skills to dictate their own hours and pay? Do they hire employees or rent office space? Do they advertise and market their services to others? The more a worker can show they make decisions about their time, compensation, and work scope, the more they can establish themselves as an independent contractor.
2. What is the worker’s investment? A worker’s investment in their enterprise may establish independent contractor status. For example, if a worker rents office space for your work. However, an Uber or Lyft driver uses their personal vehicle for work. It is not an exclusive investment in their business because they also use it personally. Additionally, if a company makes all the investments for you to work, such as providing a computer and internet line, that may suggest an employer-employee relationship.
3. How permanent is the work relationship? One factor they consider is the length and degree of permanence of the work relationship. An independent contractor is more likely to do sporadic or short-term work. And the independent contractor can work for more than one company. If you work for a company exclusively and for an indefinite period, you may be classified as an employee.
4. Does the worker control their schedule, compensation, and work? If a company tells a worker when they work and what their pay rate is, they cannot work for another company, and requires supervision, even by electronic methods, this may lead to a classification as an employee.
5. Is the work performed an integral part of the employer’s business? Where a worker’s function is an integral part of the business, that may suggest an employer-employee relationship. Uber and Lyft are ride-share service companies. Drivers are integral to their companies, so you could argue that drivers are employees instead of independent contractors. A worker who handles social media for the company could be an independent contractor since promoting on social media is not an integral part of the ride-share business.
6. Does the worker use specialized skills? Does the worker bring a set of skills to perform the work, or does the company train them? An independent contractor performs work bringing their own skill set, which they can use in their business for other companies. An employee is dependent on training for skills.
The factors are analyzed by the totality of the circumstances and not by just one factor. Additional factors may be considered as well.
In terms of proving economic independence, many independent contractors form limited liability companies (LLCs) to show they are in business for themselves. An LLC business entity provides personal liability protection to the independent contractor and offers a flexible tax structure. A single-member LLC includes any profit or loss on their personal income tax form, similar to a sole proprietor.
What Happens Now?
The implementation of the rule is scheduled for March 11, 2024. The U.S. Chamber of Commerce says it may fight the ruling in court. The American Trucking Association plans to work with Congressional members to defeat the new rule. Congress or state legislatures can pass laws to define an independent contractor.
App-based companies such as Uber, Lyft, and DoorDash claim that the new six-factor test does not affect their worker’s status as independent contractors. However, if state laws or the federal government classify gig workers as employees, these app-based companies are at risk of paying up to 30% more their workforce.
That may be good news, however, to workers who should receive benefits if they truly are economically dependent on one company for their livelihood and can’t work for other companies.
Source: