The U.S. Department of Labor (DOL) has issued a Final Rule on the standards for determining independent contractor status for purposes of minimum wage and overtime pay issues under the Fair Labor Standards Act (FLSA). Although the Final Rule is considered “new,” it is based on the standard that was applied prior to the 2021 enactment of the Trump Administration’s rule, which had relaxed the standard for classifying workers as independent contractors, but also provided greater certainty to employers. The Final Rule reinstates the so-called “economic realities” test, which is generally more likely to result in a finding that a worker is an “employee.”
The Final Rule takes effect on March 11, 2024. It is not yet clear how courts will apply its requirements. The various tests for determining independent contractor status are relatively similar, although greater emphasis may be placed on some factors over others.
The Trump-era Rule
Under the 2021 Trump Administration’s rule, independent contractor status turned on two so-called “core factors”: (1) the degree of the putative employer’s “control” over the worker, and (2) the worker’s ability to realize a profit or loss. The rule also added some weight to other factors such as the permanency of the relationship between the putative employer and the worker; the worker’s skill level; and whether the worker’s services were part of an integrated unit of production.
The “New” Final Rule
The Final Rule focuses on the economic realities of the relationship between the putative employer and the worker, or the extent to which the worker is economically dependent on the employer. The standard requires consideration of the following six factors:
- The nature and degree of control over the work being performed. This factor considers whether the putative employer exercises substantial control over the worker’s performance of the work (for example, does the employer set the worker’s schedule?). If the putative employer exerts substantial control over the worker, then this factor would weigh in favor of employee status.
- The worker’s opportunity for profit or loss. Earning a profit is not the same as earning compensation for a job done. If the worker has the opportunity to earn a profit or incur losses based on the worker’s exercise of managerial skill or business judgment, then this factor would weigh heavily in favor of independent contractor status.
- The amount of skill required for the work. To the extent that the work requires specialized training or skill that the potential employer does not provide or facilitate, this factor would weigh in favor of the worker being considered an independent contractor.
- Degree of permanence of the working relationship between the worker and putative employer. To the extent that the work relationship is definite in duration (a start and end date, for example), this factor would lean in favor of independent contractor status.
- Whether the work is part of an integrated unit of production. This factor asks whether the worker’s work is a “component of the potential employer’s integrated production process for a good or service.” This factor weighs in favor of independent contractor status if the individual’s work is separate from the production process.
- Additional factors. The DOL states that additional factors may be considered in making a determination, but only if those factors tend to show that the worker is in business for himself or herself, and not economically dependent on the potential employer.
In practice, it is difficult to tell how differently the Final Rule will function compared to the Trump-era Rule, but the Final Rule’s imposition of mandatory factors beyond the two core factors endorsed under the 2021 rule makes it more likely that a worker will be found to be an employee.
The Final Rule’s Effect on Independent Contractor Tests in Connecticut, New York and Massachusetts
Of course, the Final Rule will apply to worker determinations in New York, Connecticut and Massachusetts with respect to issues arising under the FLSA, but the tests used by each state in other contexts will continue to apply. Application of these tests, however, will require a consideration of the economic realities test to ensure that the classification meets all of the applicable tests. Essentially, employers will have to ensure that their classifications satisfy whatever standard is strictest.
Connecticut applies the “A-B-C Test” for independent contractor determinations under some of its state laws, including its wage and hour and unemployment insurance laws. Connecticut’s version of the A-B-C test considers the following factors:
- The worker is free from the control and direction of the potential employer in connection with the performance of the service, both under contract and in fact.
- The service is performed either outside the potential employer’s usual course of business or is performed outside of all the potential employer’s places of business.
- The individual is customarily engaged in an independently established trade occupation, profession or business of the same nature as that involved in the service being provided.
Factor A is the most important factor and focuses on the potential employer’s right to control both the results and methods of the work. This is similar to the emphasis placed on the 2021 Trump-era DOL rule and is one of the factors considered under the Final Rule.
Under its Workers’ Compensation Act, Connecticut uses a “right to control” test and not the A-B-C test. In any event, the right to control test is similar to Factor A of the A-B-C test.
Additionally, although there is no statutorily required test for independent contractor determinations under employment discrimination law, such determinations are based on a version of the right to control test that considers many more factors than the right to control test that applies under the Workers’ Compensation Act.
New York relies on a hodge-podge of tests depending on the applicable state law or industry. In general, New York uses a right to control test for determinations unless another law requires that a different test be applied. Under the right to control test, which applies to unemployment insurance determinations, the New York Department of Labor scrutinizes the control exercised over the result and the means for achieving the result, with the control over the means being the more important consideration.
Businesses in New York will soon be required to provide written agreements to many “freelancers” under a new law recently signed by Governor Kathy Hochul. The “Freelance Isn’t Free Act,” which will become effective on May 20, 2024, requires businesses in New York State to enter into a written agreement with any freelancer (independent contractor) who provides services with a value of at least $800.
Moreover, New York State’s Construction Industry Fair Play Act applies a presumption that a construction worker is an employee unless the potential employer can satisfy a form of the A-B-C test. Likewise, drivers of commercial vehicles are assessed under the A-B-C test. In addition, the New York State Commercial Goods Transportation Industry Fair Play Act requires the consideration of various factors for determination whether a sole proprietor, partnership, corporation or entity can be considered a separate business entity.
For purposes of the Workers’ Compensation Act, the Workers Compensation Board will consider a hybrid of the right to control and “relative nature of the work” tests. This latter test focuses on the character of the worker’s work; whether the type of work being performed is separate from the putative employer’s occupation; whether the work being performed is continuous or intermitted; the permanency of the relationship; the importance of the work in relation to the employer’s business; and whether the worker is expected to carry his or her own liability insurance coverage.
Like Connecticut, Massachusetts applies the A-B-C test to determinations under the Minimum Fair Wages Law and under the Unemployment Insurance Law. In Massachusetts, a worker is presumed to be an employee unless the potential employer can satisfy the A-B-C test.
For purposes of the Workers’ Compensation Act, Massachusetts uses a set of factors that are derived from court cases. This test incorporates elements of the right to control test, economic realities test and A-B-C test.
Under Massachusetts’ employment discrimination laws, courts consider a traditional common law test of agency, which entails a multifactor inquiry that seeks to consider the potential employer’s right to control the manner and means by which the end product is accomplished.
Despite the similarities among the different tests governing independent contractor determinations, the A-B-C test and the Final Rule’s economic realities test are more restrictive than the right to control test. While New York employers may need to make significant adjustments to their classification practices, Connecticut and Massachusetts employers will have to contend with less of a learning curve based on their experiences with the strict A-B-C test.
We will continue to report back on further developments, including further guidance from the DOL and court cases implementing the Final Rule’s requirements.
Please feel free to reach out to Murtha Cullina’s Labor and Employment group if you have any questions.