The Age-Old Argument Of Who Qualifies As An Independent Contractor

• Published date: 17 August 2021
• Subject Matter: Employment and HR, Tax, Contract of Employment, Employee Benefits & Compensation, Income Tax
• Law Firm: Hurwitz & Fine
• Author: Ms Ann Evanko and Evan D. Gestwick

In the waning weeks of a tumultuous term in Office, then-President Donald J. Trump suspended what had been known and relied upon as a long-standing list of factors used in deciding how to designate a worker as an employee or an independent contractor. President Joseph R. Biden, Jr. then took his seat in the Oval Office and suspended Trump's change, later revoking it entirely. This "see-saw" turbulence has created uncertainty and confusion for employers who seek a more reliable way of determining who can withstand the United States Department of Labor ("DOL") or Internal Revenue Service ("IRS") scrutiny of one's designated status.

The importance of properly classifying a worker as an employee or independent contractor cannot be understated. If improperly classified, the employer faces back-taxes, penalties, interest, and reclassification of all workers in the same position to an employee status. Among other adverse consequences, employers become liable for workers' compensation and other insurance costs and benefits that an independent contractor otherwise would be paying on his or her own.

On January 7, 2021, with less than two weeks remaining in its term, the Trump Administration adopted a new five-factor test, effective March 8, 2021, later dubbed the "economic realities test" which would replace the long-standing list of factors in play to decide the independent contractor question. The economic realities test took a two-pronged approach with initial consideration of: (1) the nature and degree of the worker's control over the work; and (2) the worker's opportunity for profit and loss. If these two considerations were insufficient to conclusively decide the question, then three additional factors were to be considered: (1) the amount of skill required for the position; (2) the permanence of the working relationship; and (3) how integrated the worker's role is to the organization's overall operation. The goal of this test is to determine whether, as a matter of economic reality, the worker is dependent on a particular individual, business or organization for work" or if the worker instead is in business for himself. "Independent Contractor Status Under the Fair Labor Standards Act (Final Rule)." 86 Fed. Reg. 1168-1248 (Jan. 7, 2021) (to be codified at 29 C.F.R. parts 780, 788, and 795).

The "economic realities" test is seen as another pro-employer policy of the Trump Administration that would never see the light of day. On January 20, 2021, the Biden...