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U.S. Department of Labor (DOL) Issues Finalized Employee Classification Regulations

January 23, 2021

By Michael Burns, courtesy of SBAM Approved Partner ASE

On January 6, 2021 the DOL published its final rule to help employers determine whether workers can be legally treated as independent contractors (I/C) or employees of the business. If a worker is an independent contractor the business does not have to pay them minimum wage, overtime, do recordkeeping, provide benefits, or even collect employment taxes as they would if the worker is, in fact, an employee.

The finalized rules establish a weighted “economic reality” test that looks at whether the worker is in business for themselves as opposed to being economically dependent on an employer.

The test specifies two core factors that have more weight on the determination:

  1. What control does the worker have over their own work? (nature and degree of control)
  2. Is there an opportunity for profit or loss as a result of personal investment?

If the answer to those two test criteria is YES, then it can be presumed the worker is not an employee and is an independent contractor.

If the answer to one of those questions is NO, the rule specifies three other factors to use in further analyzing the engagement:

  1. What skill is required for the position?
  2. How permanent is the working relationship between the two parties?
  3. Is the work performed by the worker part of an integrated unit of production?

This test “sharpens this inquiry into five distinct factors, instead of the five or more overlapping factors most used by most courts and previously” by the DOL.

Keep in mind this is one of many employer-independent contractor tests out there. State courts and state agencies, including Michigan, have their own definition depending upon what situation is in front of them. Federally, the NLRB and EEOC in the employment and labor arena have their own tests for employee or independent contractor status.

Readers will recall multiple articles going back several years addressing the differences of tests for independent contractor and how often these criteria are changed by the federal agencies. The transient nature of the rules reflects the different politics between a GOP run and a Democratic party run administration. The Trump Administration is rushing to put these rules out before the change to the Biden Administration. These rules as such are not expected to survive under the Biden Administration’s Department of Labor.

In any case, these rules will otherwise go into effect Mach 8, 2021 after the required 30-day comment period is through. Pro-worker groups expressed disappointment with the DOL’s position on this matter and will no doubt work to change it under the new administration.

One interesting thing these rules do provide is they also allow an employer to offer their independent contractors benefits without altering their status as I/C’s. This has been a long-time concern of employers under the law previous to this. The concern was if benefits were provided to an outside contractor, the law would consider that proof of an employment relationship. To provide benefits the rules state that the IC benefits have to be “slightly” different than those benefits employees receive. Though not compelling employers to offer benefits, it does provide an employer to offer gig workers (e.g.Uber drivers) group benefits  such as health insurance and retirement contributions. Specifically, the rules state “the offering of health, retirement, and other benefits is not necessarily indicative of employment status.”

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