Will the “Economic Reality” Test for Independent Contractors be Changed Under the New Administration?

Many Texas employers whose worker classification is difficult to determine have questions about the new administration’s U.S. Department of Labor (DOL) rules regarding independent contractors. More specifically, the test that employers should apply to determine whether a worker is an independent contractor or an employee may not be clear given that the Trump-era independent contractor rule has been withdrawn. That rule created an “economic reality” test that included two central or core factors that employers could use to determine a worker’s status. The DOL rescinded that rule, however, and the repeal took effect on May 6, 2021.

If you are an employer and you have workers who may be classified as employees or independent contractors, should you assume that the economic reality test has been changed under the new administration? In brief, the answer is yes, but we want to provide you with more information that can be helpful to employers navigating the complicated issue of worker classification.

Understanding the Previous Trump-Era Rule

The economic reality test was affirmed in a DOL final rule issued on January 6, 2021, which was set to take effect on March 8, 2021. Shortly after the change in presidential administrations, the DOL withdrew that Independent Contractor Final Rule. Under that now-repealed final rule, employers would have used five factors, including two “core” factors, to determine whether an “individual is, as a matter of economic reality, in business for him or herself,” and thus whether that individual should be classified as an independent contractor. The two core factors included:

  • The nature and degree of control over the work; and
  • The worker’s opportunity for profit or loss based on initiative and investment.

Three additional factors, which were designed to provide additional guidance, included:

  • The amount of skill required for the work;
  • The degree of permanence of the working relationship between the worker and the potential employer; and
  • Whether the work is part of an integrated unit of production.

Economic Reality Test Rule Withdrawn

Now that the DOL final rule articulating the factors to be used in the economic reality has been withdrawn, should employers expect that the test for determining independent contractor status will change altogether in the new administration?

In withdrawing the rule, U.S. Secretary of Labor Marty Walsh said that the reason was to “help preserve essential worker rights and stop the erosion of worker protections that would have occurred had the rule gone into effect.” President Biden has suggested that, rather than an economic reality test, he may support a standard for classifying independent contractors that is similar to the ABC test currently used in California, which says that a worker is an employee (and not an independent contractor) unless all three of the following elements are met:

  • The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  • The worker performs work that is outside the usual course of the hiring entity’s business; and
  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Currently, no rule has been created to replace the economic reality test in the DOL final rule that has been withdrawn.  As such, the traditional FLSA interpretation remains regarding independent contractor status – namely, that worker status is determined by examining five factors in which no individual factor is determinative.

Contact a Dallas Employment Lawyer

Do you have questions about the test you must use to classify workers as independent contractors or employees? Our Texas employment law attorneys can assist you. Contact Simon Paschal PLLC today.

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