The more things change, the more they remain the same. Case in point: the U.S. Department of Labor’s guidelines for determining whether someone is an employee or an independent contractor. In September 2020, the Department of Labor (DOL) proposed a rule to clarify employee and independent contractor status under the Fair Labor Standards Act. This rule would have made it easier for workers to be treated as independent contractors instead of as employees. It was scheduled to take effect on March 8, 2021.

In late January 2021, a new administration moved in at 1600 Pennsylvania Avenue NW in Washington, D.C., and delayed the new rule’s effective date. Then they officially withdrew the rule. You could call it “the rule that never happened.” Whether that’s good or bad depends on your circumstances, but withdrawing the rule hasn’t made it any easier to determine whether a worker should be classified as an employee or an independent contractor.

Making this determination has always been a challenge, and it continues to be so. And the fact that some states have their own rules doesn’t help matters in the least. In this post, we explain the rules and tests to shed some light on this perplexing topic.

Why the Distinction Matters

Worker classification has always been a hot-button issue. Pro-business administrations typically lean toward relaxing the rules, so that businesses have more leeway in determining how workers are classified. Some businesses prefer to use independent contractors because they facilitate scalability and generally cost less than employees. In addition, when they have more leeway in deciding who’s an employee and who’s an independent contractor, maintaining compliance with labor laws and tax laws is easier.

Pro-worker administrations, on the other hand prefer that businesses classify more workers as employees to ensure fair treatment, compensation, and benefits. When businesses have more leeway in deciding whether a worker is an employee or independent contractor, some businesses choose to hire fewer employees or even lay off employees or place them on contract (instead of hourly pay or salary) and eliminate their protections and benefits under the law.

The Biden administration would like to see more workers classified as employees and favors an ABC Worker Classification-type Test at the federal level like the test used in several states. However, to date, no federal rule or law has been adopted that requires an ABC test.

The Economic Realities Test

Currently, the DOL uses the economic realities test to classify workers. The economic realities test considers a variety of factors, including the following: Continue reading… Continue reading… Continue reading…