The Latest on Employee Versus Independent Contractor Test

May 20, 2021
Cathy Kelaghan – ckelaghan@stall-legal.com

The U.S. Department of Labor (DOL) issued a final rule on May 6, 2021 that withdraws the Trump-era test for independent contractor status. 

The prior administration’s rule streamlined the factors to consider when determining if a worker is an employee or an independent contractor.  It prioritized two “core factors” – (1) the nature and degree of the worker’s control over his/her work; and (2) the opportunity for profit or loss.  If these two core factors were not determinative, other factors would be considered:  (1) skill required to do the work; (2) permanence of the working relationship; and (3) if the work was part of an integrated unit of production.

With the withdrawal of the Trump administration’s rule, the DOL’s prior seven-factor test will remain in place, as will the various versions utilized by many federal courts.  The seven-factor test focuses on the economic reality of whether the worker is truly in business for himself/herself.  The seven factors are:

1. The extent to which the services rendered are an integral part of the principal’s business.
2. The permanency of the relationship.
3. The amount of the alleged contractor’s investment in facilities and equipment.
4. The nature and degree of control by the principal.
5. The alleged contractor’s opportunities for profit and loss.
6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
7. The degree of independent business organization and operation.

These seven factors are weighted equally and the DOL states that certain factors are immaterial in determining whether there is an employment relationship.  The place where work is performed, the absence of a formal employment agreement, or whether an alleged independent contractor is licensed by State/local government have no bearing on determining whether there is an employment relationship.  Also, the U.S. Supreme Court has held that the time or mode of pay does not control the determination of employee status.

If you have or are contemplating having arrangements with independent contractors, be sure to familiarize yourself with this DOL guidance.  As always, Stall Legal is available to assist and answer any questions you may have.