Compliance just got trickier with paying your firm’s independent contractors.
Here’s why: A federal judge in Texas has just reinstated the Dept. of Labor’s (DOL’s) economic reality test rule.
The rule, passed under the Trump administration, allows employers to use certain business factors to determine whether someone is an independent contractor or employee.
Economic reality & independent contractors
With the economic reality test rule, two core factors determine a worker’s relationship with an employer:
- The amount of control the worker has over the work they’re doing
- The extent of the worker’s opportunity for profit or loss.
The rule references three additional factors that can be considered if there’s still confusion after an employer has reviewed the core factors:
- The amount of specialized training or skill required for the worker to perform the job (and not provided by the employer)
- The permanence of the working relationship with the worker (leaning toward independent contractor status if it’s more sporadic or has a definite, limited duration), and
- The extent to which the work is part of an integrated unit of production in the company.
Under President Biden, the DOL delayed and eventually rescinded this rule. The agency said it needed more time to craft guidelines on independent contractors that were fair to both workers and employers.
Process illegal, judge says
But a judge said the agency did this without a proper notice and comment period for any affected stakeholders. And this was in direct violation of the Administrative Procedure Act.
This happened twice, the judge said. The first violation occurred in February 2021 when the DOL delayed the rule. And the second violation happened in May 2021 after the agency withdrew it right before its new effective date.
Because these actions violated the law, the rule was still valid. So, the judge said it was effective as of March 8, 2021, the date it was initially finalized.
Proceed with caution
While the economic reality test is more favorable to companies, you’ll have to tread lightly when using it.
Reason: The DOL could still appeal the decision and create a different rule to govern the treatment of independent contractors.
We’ll keep you posted.