In the waning weeks of a tumultuous term in Office, then-President Donald J. Trump suspended what had been known and relied upon as a long-standing list of factors used in deciding how to designate a worker as an employee or an independent contractor. President Joseph R. Biden, Jr. then took his seat in the Oval Office and suspended Trump's change, later revoking it entirely. This "see-saw" turbulence has created uncertainty and confusion for employers who seek a more reliable way of determining who can withstand the United States Department of Labor ("DOL") or Internal Revenue Service ("IRS") scrutiny of one's designated status.
The importance of properly classifying a worker as an employee or independent contractor cannot be understated. If improperly classified, the employer faces back-taxes, penalties, interest, and reclassification of all workers in the same position to an employee status. Among other adverse consequences, employers become liable for workers' compensation and other insurance costs and benefits that an independent contractor otherwise would be paying on his or her own.
On January 7, 2021, with less than two weeks remaining in its term, the Trump Administration adopted a new five-factor test, effective March 8, 2021, later dubbed the "economic realities test" which would replace the long-standing list of factors in play to decide the independent contractor question. The economic realities test took a two-pronged approach with initial consideration of: (1) the nature and degree of the worker's control over the work; and (2) the worker's opportunity for profit and loss. If these two considerations were insufficient to conclusively decide the question, then three additional factors were to be considered: (1) the amount of skill required for the position; (2) the permanence of the working relationship; and (3) how integrated the worker's role is to the organization's overall operation. The goal of this test is to determine whether, as a matter of economic reality, the worker is dependent on a particular individual, business or organization for work" or if the worker instead is in business for himself. "Independent Contractor Status Under the Fair Labor Standards Act (Final Rule)." 86 Fed. Reg. 1168-1248 (Jan. 7, 2021) (to be codified at 29 C.F.R. parts 780, 788, and 795).
The "economic realities" test is seen as another pro-employer policy of the Trump Administration that would never see the light of day. On January 20, 2021, the Biden Administration implemented a regulatory freeze on the economic realities test pending review by the Biden Administration itself. See "Regulatory Freeze Pending Review." 86 Fed. Reg. 12,535 (Jan. 20, 2021). The DOL then permanently withdrew the economic realities test on May 6, 2021. In doing so, the DOL cited three principal reasons: (1) that the economic realities test was in contrast with the Fair Labor Standards Act ("FLSA")'s text and purpose, as well as relevant judicial precedent; (2) that the rule's prioritization of two 'core factors' for determining employee status under the FLSA would undermine the long-standing test as well as judicial precedent requiring a review of the totality of the circumstances related to the employment relationship; and (3) that the rule would have narrowed the facts and considerations comprising the analysis of whether a worker is an employee or an independent contractor, resulting in workers losing FLSA protections. See "Independent Contractor Status Under the Fair Labor Standards Act (FLSA): Withdrawal." 86 Fed. Reg. 24,303 (May 6, 2021).
More than ever before, workers are engaging in self-employment. In this light, the Trump Administration attempted to change the way we differentiate employees from independent contractor in a highly critical way by inquiring whether a worker is dependent on the alleged employer for work, as opposed to the income received. That is, one may be considered an "independent contractor" under this test by virtue of generating their own business and work, notwithstanding their continued dependence on another company for income.
While the Biden Administration has yet to announce whether we will continue to follow the long-standing test or adopt a new one, it is worth mentioning that the United States House of Representatives ("House of Representatives") recently passed the "Protecting the Right to Organize Act," which would apply California's "ABC test" to labor organizations. See Protecting the Right to Organize Act, H.R. 842, 117th Cong. (2021). Originally developed in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018), the ABC test employs a three-part inquiry: (1) whether the worker is under the control of the employer for the performance of the work; (2) whether the work is within the usual course of the employer's business; and (3) whether the worker is 'customarily engaged' in an independent trade or business that is the same as the work performed for such employer. Experts in this field have opined that this ABC test favors findings of "employee" over those of "independent contractor."
While this may be the direction in which this issue is headed at the federal level, it is equally important to know and take into consideration one's own state's laws. For example, in addition to making substantially the same inquiries as California's ABC test does,1 New Jersey courts make an additional inquiry into whether the person at issue is normally involved in an independent trade, occupation, or business. See N.J. Rev. Stat. § 43:21-19(i)(6) (2018). Meanwhile, in New York, a test similar to the traditional set of factors test is used, which considers, inter alia, whether the worker: (1) works at his or her own convenience; (2) is free to engage in other employment; (3) receives fringe benefits; (4) is on the putative employer's payroll; and (5) is on a fixed schedule. See generally Bynog v. Ciprani Group, Inc., 1 N.Y.3d 193 (2003).
As mentioned above, a misclassification between "independent contractor" status and that of "employee" carries significant consequences for both workers and employers, including, inter alia: (1) higher tax liability, because self-employment tax rate is higher than that included in FICA; (2) lack of access to unemployment benefits, because independent contractors do not have any employer to pay the unemployment tax (SUTA or FUTA) tax on their wages; (3) lack of protection under the minimum wage and overtime laws under the FLSA; (4) lack of insurance coverage, such that an independent contractor may not receive workers' compensation or state disability insurance; and (5) lack of benefit options, such as retirement plans, health insurance, or paid time off. See Blakely-Gray, "What the Biden Administration Means for the New DOL Rule on Contractors," Available at https://www.patriotsoftware.com/blog/payroll/new-dol-rule-contractors-2021/ [Last Accessed: June 2, 2021].
Given the significant adverse consequences that the misclassification of an independent contractor can create for businesses and workers alike, it is helpful for the contracting business to develop a written contract to be signed that specifically designates the worker as an independent contractor and outlines the worker's responsibilities for self-employment tax and for all other benefits and insurance. As part of one's due diligence, proof of the individual's tax identification number, business name/filings, and insurances are essential. The business may want to add a statement as to what the independent contractor's scope of responsibilities include while stating that the business will not exert any control over the independent contractor's work, the manner and method of performance of the work, including but not limited to the date(s), time(s), duration(s), location(s), method(s), or any other specific detail of the work other than the final product. It is helpful to state that the independent contractor is not working exclusively for the business and state that the independent contractor is not prohibited from working with other third parties. Of course, one should include clauses to protect the business' confidential and proprietary information. Employers should seek advice of competent labor and employment counsel who may include other favorable clauses that utilize not only the twenty factors from the long-standing test of factors, but also the factors from the ABC test. While not definitive, it will certainly help if audited.
1 Those are: (1) how; (2) when; and (3) where the work is performed.
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