On July 15, the US Department of Labor (DOL) issued a new Administrative Interpretation detailing the economic realities test used to determine worker classification. This new clarification means that the majority of workers who have been justified as 1099 independent contractors (ICs) according to traditional interpretations of the Fair Labor Standards Act (FLSA) will no longer be considered such. According to the Interpretation, “…most workers are employees under the FLSA.”
While the labor guidance is meant to outline the DOL’s interpretation of its own statutes and “does not have the force of law,” Lexology’s SimplyHR article notes that the courts will strongly consider the DOL’s interpretation in future legal proceedings. Therefore, employers hoping to avoid future charges of misclassification would be wise to observe the new guidelines.
What Is the Economic Realities Test?
Below is a brief summary of the DOL clarification of the “economic realities” six-factor test:
- Is the work performed an integral part of the employer’s business? DOL Clarification: Regardless of whether the work only represents one small element of the business or the same duty(s) are completed by many other workers, an individual’s work may still be considered integral.
- Does the worker’s managerial skill affect his/her opportunity for profit or loss? DOL Clarification: A true 1099 IC “exercises managerial skills, such as hiring other workers, purchasing equipment, advertising for work, etc., in order to increase his profits.” The ability to increase income by choosing to work additional hours is not enough to indicate 1099 IC status.
- How do the relative investments in facilities and equipment by the worker and employer compare? DOL Clarification: A true 1099 IC must have made significant investments in comparison to those made by the employer, illustrating the reality of an independent business.
- Does the worker exercise special skill or initiative? DOL Clarification: A true 1099 IC must exercise specialized skills that allow them to operate businesses separately from that of the employer. It is not enough for them simply to possess those technical or professional skills – they must be utilized.
- What is the permanency of the worker’s relationship with the employer? DOL Clarification: For a true 1099 IC, a long-term, exclusive relationship with only one employer would prevent the worker from realizing a significant opportunity for profit.
- What is the nature and degree of the control exercised by the employer? DOL Clarification: The DOL takes the stance that many workers, particularly remote workers, may have control over large portions of their work, but this control is irrelevant in worker classification considerations unless it shows that the worker is operating a business independently from the employer. While employers have historically leaned heavily on this factor, the DOL guidance holds that “the control factor should not overtake the other factors of the economic realities test” or “play an oversized role” in worker classification.
Essentially, the guidance boils down to an ultimate determination of whether a worker is economically dependent on the employer or is, in fact, operating their own independent business.
Recruiter Implications of the Independent Contractor Test
What does this mean for recruiters? Several things:
- Recruiters can educate their clients about the new guidelines. Worker misclassification consequences can be very costly for employers, and they may need you to point it out if they are in dangerous waters.
- Employers that find they are out of compliance after applying the new guidelines will need to come up with an employment solution for their current 1099 ICs. Recruiters can help their clients with a solution for their dilemma: Switch misclassified 1099 ICs to contractors who are the legal W-2 employees of a back-office service like FoxHire, LLC.
- Recruiting firms may also want to look at their own 1099 ICs, if they have any, and apply the guidelines with a critical eye.
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