The U.S. Department of Labor issued revisions to its “white collar” exemptions to minimum wage and overtime requirements. This has prompted the Office of the General Counsel to issue a memorandum setting forth guidelines on whether a worker is properly classified as an “employee” or as an “independent contractor.” The memorandum reviewed the three traditional tests that determine employment status: (1) the common law control test; (2) the “ABC” test; and (3) the economic realities test.
The common law control test—which the Internal Revenue Service uses for federal tax purposes—looks to three categories: behavioral control (i.e. does the employer control the worker’s work?); financial control (i.e. method of calculating payment to worker or whether there are unreimbursed expenses); and relationship of the parties (i.e. expressed intent of the parties through contract or issuance of a 1099 versus W2). The “ABC” test provides that a worker is an independent contractor where there is: (1) Absence of control; (2) Business is outside the usual course of the workplace’s business or performed away from workplace’s offices; (3) work is Customarily done by independent contractors.
The OGC, in analyzing a recent DOL administrative decision, opined that the DOL had sought to drastically limit the ability of businesses to classify workers as independent contractors. Thus, the DOL modified the traditional economic realities test in favor of setting forth six factors to balance when determining if a worker is an employee or independent contractor:
- Whether the work is an integral part of the business;
- Whether the worker’s managerial skill affects his or her opportunity for profit or loss;
- The relative investments of the business and worker;
- Whether the work performed requires special skills and initiative;
- Whether the relationship between the worker and the business is permanent or indefinite;
- The nature and degree of the business’ control over the worker
The OGC emphasized that no single factor was determinative and each factor should be considered. However, the DOL stated that the second and third factors are ones to be emphasized and that the sixth factor, the “control” factor should not be over-emphasized.