Employee or Independent Contractor?

DOL Issues New Guidance Effective March 8, 2021

On January 7, 2021, the United States Department of Labor (“DOL”) released new guidance for analyzing whether a worker is an employee or an independent contractor.  The new rules will go into effect on March 8, 2021.  However, the Biden Administration may take action to delay or rescind the updated regulations before the rules’ effective date.

A fundamental question arises in a business’ operation as to the status of any given worker – is the worker an employee or an independent contractor?  The analysis the DOL utilizes in such consideration is complicated and may be misunderstood.  Notably, other governmental agencies, such as the Internal Revenue Service, may assess a worker’s status as an employee or independent contractor based on its analytical framework.

The DOL explained that independent contractors are workers who, as a matter of economic reality, are in business for themselves, as opposed to being economically dependent on an employer for work.  In other words, the overarching analysis is to assess the economic realities of the employment relationship, rather than, for example, merely considering a worker an independent contractor because a company issues that person a Form 1099-MISC.  Pursuant to the economic dependence analysis, the DOL clarified the factors it will apply in determining employee or independent contractor status.

In answering the question of economic dependence, the DOL will apply a five (5) factor test to determine whether a worker is an employee or an independent contractor.  No one factor is dispositive.  However, two of those factors, referred to as the core factors, are the most probative of economic dependence – (1) the nature and the degree of the worker’s control over the work and (2) the worker’s opportunity for profit and loss.  The other three (3) factors are (i) the amount of skill required for the work, (ii) the degree of permanence of the working relationship, and (iii) whether the work is part of an integrated unit of production.  Importantly, the DOL explained that if both of the core factors point toward the same classification, as either an employee or independent contractor, there is a substantial likelihood the applicable classification is appropriate.

The analysis that applies to determine whether a worker is an independent contractor or an employee is complex and requires an analysis of the particular facts in a given situation.  To stay compliant and up to date on changes in employment law, contact Peter Langdon at [email protected].