DOL’s October 11, 2022 Updated Independent Contractor Guidance
As a part of its multi-year project to clarify the differences between an employee and an independent contractor, the Department of Labor (“DOL”) has issued yet another new set of standards for determining proper worker classification.
The DOL has proposed to replace its latest “core factor” test, which has been the law of the land off and on since 2021, with a “a totality-of-the-circumstances analysis.” But fear not! The difference between these two tests is remarkably slim. In fact, at first glance, they might look almost identical… because they practically are the same.
Under the “core factor” test, the DOL implemented a 5-factor analysis that took place in two steps: if the first two factors agreed on a particular classification, the other 3 factors were discarded as irrelevant. The last 3 factors only served as “tie breakers” when the first 2 factors didn’t agree. You might remember this analysis from our prior article on this topic: https://www.senseniglawfirm.com/news/2022/3/29/the-new-old-independent-contractor-standard-to-use-starting-in-march-of-2022.
Under the “new” totality-of-the-circumstances analysis, there are 6 factors, each which are given equal weight. Of these 6 factors, 5 are just the very same factors from the core factor test, and the 6th is an expansion of the “opportunities for profit and loss” factor. Of the existing factors, “degree of permanency” has been amended to consider the “exclusivity” of the working relationship. The minimal changes to the factors themselves are listed below, with the “new” factor being addressed in Section 3, and the “exclusivity” factor being addressed in Section 5(c).
The factors themselves really haven’t actually changed in any meaningful way, but now no particular factor is afforded any more weight than any other factor.
The 6 factors to consider are as follows:
The nature and degree of control over the work. If an individual exercises significant control over how he/she gets work done, he/she is more likely to be considered an independent contractor.
Autonomy is key: in the textbook example, you tell independent contractors what needs doing and by when, and that’s the last you see of them until the task is complete; in short, independent contractors use their professional expertise and judgment to accomplish assigned tasks, while employees follow orders.
Every instruction you issue is another point towards independent contractor status. Some common points courts look to for this factor are:
Do you set the putative employee/contractor’s hours (employee), or do you merely provide a deadline (contractor)?
Do you assign them work (employee), or do you offer them work (contractor)?
Do they request time off (employee, or do they inform you they’re modifying their schedule (contractor)?
This is a subtle but crucial distinction: can they refuse your instructions in favor of their preferred methods, provided they successfully accomplish the job? Think hard here, because most people reflexively insist “yes,” when the answer is actually “yes, but with obvious detrimental consequences,” which won’t pass muster under this factor.
Is the individual worker in charge of his/her own methods? As in did the individual worker arrive with his/her own plan to accomplish the job (contractor), or are they merely executing your own plan (employee)?
The worker's opportunity for profit or loss based on initiative and investment. If a worker can adjust their earnings on their own initiative or through business investments and expenditures, he/she is likely an independent contractor.
If the putative employee/contractor works hard to improve your sales, posting flyers and showing up to networking events, do they end up with more personal profits when all is said and done? If yes, then this factor weighs heavily towards independent contractor; if no, then this factor weighs just as heavily in the opposite direction.
For example: if an employee at Dollar General works their proverbial butt off advertising for the business, and – through social media savvy and pure grit – triples the customer base at their store, that doesn’t really help that employee much, if at all. Their hourly wage does not change depending on how many customers they service throughout their shift; their marketing efforts have earned them additional work, with no additional reward. In this scenario, we’re dealing with an employee, because their success is only barely and tangentially tied to the success of the business itself.
This next point is crucial: the argument that workers ultimately benefit when their company succeeds does not apply here; we’re talking about immediate cause-and-effect, not long-term trends in working hours or annual raises. The less intervening factors between the putative employee’s/contractor’s actual performance and their earning potential, the more likely this factor will weigh towards independent contractor, as opposed to employee.
The amount of the worker's investment in facilities and equipment. If a worker is reimbursed for any purchases – materials, supplies, travel, etc. – he/she is more likely to be an employee. If a worker uses his or her own tools or equipment, he/she is more likely to be an independent contractor.
Independent contractors provide their own tools; can you imagine hiring a plumber, just to have him/her show up and ask you for a wrench?
Similarly, can you imagine hiring a receptionist, and demanding that he/she bring his/her own computer and telephone?
Just to nip this in the bud: no, you cannot convert an employee into an independent contractor by billing them for supplies.
The amount of skill required for the work. If a worker has to deploy skills or training that is not provided by his/her employer, he/she is likely an independent contractor.
This factor means more or less exactly what it says: you do not train independent contractors, period. Contractors are hired precisely because they already possess the skills they need to complete the job.
Suffice it to say, any training beyond “here’s how you submit invoices” is a point toward employee status.
The degree of permanence of the working relationship between the worker and the potential employer. Employment arrangements that are expected to last for a specific period of time, or that are unpredictable, are more likely to be independent contracting relationships.
Independent contractors are not engaged indefinitely; you wouldn’t keep a plumber on payroll for months at a time. You engage an independent contractor to accomplish a specific task, and once that task is complete, the engagement ends.
That’s not to say you can’t engage a contractor again for similar tasks later – even immediately after the first task is complete – but the longer a putative employee/contractor remains consistently on payroll, the more likely you’re dealing with an employee.
Under the newly proposed guidance, exclusivity is another relevant consideration here. Independent contractors do not rely on a single source of income, but rather, service many clients at any given time. If you are the only source of a worker’s income – i.e., if the worker is economically reliant upon you or your business for their livelihood – then they are probably your employee.
Whether the work is part of an integrated unit of production (or the individual works under circumstances analogous to a production line). If a worker’s job is integral to the employer’s core business, then he/she is more likely an employee, not an independent contractor.
The law views independent contractors as professionals you bring in to provide a service which is essential to run your business, but not – strictly speaking – a part of your business. The easiest way to grasp this factor is by way of example:
Chiropractor runs a chiropractor office.
Chiropractor hires Jane Doe to perform chiropractic services.
This factor presumes that Jane Doe is an employee because she’s providing the service for which the business exists (i.e., chiropractor). Conversely...
Chiropractor hires John Doe to install wooden floors.
The presumption is that John Doe is an independent contractor because Chiropractor’s business in no way relates to the service John Doe is providing (i.e., carpentry).
Under the DOL’s new proposed guidance, to distinguish between employees and independent contractors, you simply determine which classification has the most factors weighing in its favor and apply that classification to the worker.
At this point, you’re probably noticing the error that makes this a somewhat problematic version of the employee vs. independent contractor analysis: with an even number of factors at work, what happens in the event of a tie…? In that case, the DOL points towards a miscellaneous “catch-all” 7th factor:
“(7) Additional factors. Additional factors may be relevant in determining whether the worker is an employee or independent contractor for purposes of the FLSA, if the factors in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the employer for work.”
It doesn’t take a legal scholar to see that this 7th factor provides little useful guidance and could easily be used to argue that any given worker is an employee or independent contractor, depending upon which classification is more advantageous.
In the event of a tie or any confusion, please feel free to reach out to schedule a consult with us today with any questions.