Will you fail the economic realities test for independent contractors?

In reevaluating your independent contractors will you fail the economic realities test?
In reevaluating your independent contractors will you fail the economic realities test?

Does your organization use independent contractors on a regular basis? If yes, then you are likely to have your relationships challenged. In mid-July the USDOL Wage and Hour Division issued a new interpretation of what being an independent contractor means. They have made no secret of the fact that they are clamping down on the use of independent contractors and this new interpretation moves along that agenda.

Economic realities test

The interpretation from the USDOL makes it clear that a proper view of the economic realities test will generally lead to the conclusion that “applying the economic realities test in view of the expansive definition of “employ” under the Act, most workers are employees under the FLSA.” Yes, read that sentence again “most workers are employees under the FLSA.” That statement signals that to use an independent contractor you must be meet all the standards of the economic realities test. The “short test” is determined by answering the question ”Is this worker economically dependent on the company?” If the answer is “yes” then they are NOT independent.
The economic realities test generally includes the following factors:

  • the extent to which the work performed is an integral part of the employer’s business;
  • the worker’s opportunity for profit or loss depending on his or her managerial skill;
  • the extent of the relative investments of the employer and the worker;
  • whether the work performed requires special skills and initiative;
  • the permanency of the relationship; and
  • the degree of control exercised or retained by the employer.

Fail this test and you have an employee and not an independent contractor.

Other considerations from the interpretation

Attorney Rachel Ziolkowski Ullrich of FordHarrision said that the interpretation also made some other important points. These include:

  • “Work integral to the business” does not mean it has to be performed on the company premises. This work can be performed in a worker’s home too.
  • That worker’s business has to be affected by their managerial skills and that means they have an opportunity for profit or loss.
  • Having a specialized skill does not mean independent.
  • Even though a worker may not be employed throughout the year does not make them independent if that lack of employment is due to the nature of the business, such as seasonality.
  • It may ultimately come down to control, not so much in how much control is actually exercised but how much can be exercised.

With this new interpretation it is time to re-evaluate your independent contractor relationship. Many of you may discover those you employee as IC’s may in reality be employees. Be prepared to make them employees and sever that independent relationship.

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