DOL Falls Back to the Economic Realities Test for Independent Contractors

On May 6, 2021, the U.S. Department of Labor (DOL) rescinded a final rule published on January 7, 2021, clarifying the considerations of the economic realities test, and thus the standards for determining whether a worker is an employee or independent contractor. The DOL indicated that they withdrew the rule because, among other reasons, the rule would most likely have resulted in more workers being considered independent contractors and losing FLSA protections.

The Biden Administration’s revocation of the rule reinstates the former economic realities test. Under the economic realities test, a court will consider seven factors when determining whether a worker is an employee or an independent contractor:

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

It’s important to note that the economic realities test is not an all or nothing test, but rather presents various factors that a court will weigh and consider when making a determination about a worker’s status. Because there is not a bright-line rule, it can be difficult to determine with certainty whether some individuals who meet some of the considerations, but not all, will be found to be either an employee or an independent contractor.

No one factor is dispositive; the fact that a worker works remotely, completes a 1099 form, or signs an independent contractor agreement does not conclusively determine a worker’s employee or independent contractor status.

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