EMPLOYERS MAY FIND COMFORT IN THE ECONOMIC REALITY TEST FOR INDEPENDENT CONTRACTORS

The U.S. Department of Labor (“DOL”) Administrator’s Interpretation No. 2015-1[1] (“AI 2015-1”) referenced the use of the Economic Reality Test for companies to determine whether workers were independent contractors or employees.  President Obama’s DOL further stated that most workers were employees under the Fair Labor Standards Act (“FLSA”).  Earlier this month, President Trump’s DOL withdrew AI 2015-1 and on the DOL website, states that removal of AI 2015-1 “does not change the legal responsibilities of employers under the Fair Labor Standards Act . . ..”

As it relates to independent contractors, among other things, companies should still look to the Economic Reality Test in determining whether an individual is an employee or an independent contractor.  Baker v. Flint Engineering & Const. Co., 137 F.3d 1436, 1440 (10th Cir. 1998)(citing  Henderson v. Inter–Chem. Coal Co., Inc., 41 F.3d 567, 570 (10th Cir.1994) and Dole v. Snell, 875 F.2d 802, 804 (10th Cir.1989)). Under the test, “the focal point is ‘whether the individual is economically dependent on the business to which he renders service ... or is, as a matter of economic fact, in business for himself,’’  Baker, 137 F.3d at 1440.  The courts inquire into whether the alleged employer has the power to hire and fire employees, supervises and controls employee work schedules or conditions of employment, determines the rate and method of payment, and maintains employment records. Id. (citing Watson v. Graves, 909 F.2d 1549, 1553 (5th Cir.1990)). 

Under the economic reality test, courts generally look at “(1) the degree of control exerted by the alleged employer over the worker; (2) the worker's opportunity for profit or loss; (3) the worker's investment in the business; (4) the permanence of the working relationship; (5) the degree of skill required to perform the work; and (6) the extent to which the work is an integral part of the alleged employer's business.” Henderson, 41 F.3d at 570.  When considering these factors, courts consider the totality of the circumstances; none of the factors alone is dispositive. Id. at 570

In continuing to work with independent contractors, Campbell Litigation encourages companies to seek guidance from the Economic Reality Test and from previous guidance on independent contractors provided in related Rocky Mountain Employer Blog articles to ensure that the company does not exercise excessive control over the contractor’s work and, in Colorado, ensuring compliance with the state statutes.[2]  However, given the DOL’s withdrawal of AI 2015-1, companies should have some comfort in knowing that the DOL likely will not consider most workers employees under the FLSA.

[1] AI 2015-1 was titled “The Application of the Fair Labor Standards Act’s ‘Suffer and Permit’ Standard in the Identification of Employees Who are Misclassified as Independent Contractors.”

[2] Independent Contractor Misclassification Still a Concern for Colorado Companies, The Rocky Mountain Employers Blog, March 16, 2017, http://www.rockymountainemployersblog.com/blog/2017/3/16/independent-contractor-misclassification-still-a-concern-for-colorado-companies; see also Second Circuit Breaths New Life into Independent Contractor Relationship, Finding Black Car Drivers in NYC are Independent Contractors, The Rocky Mountain Employers Blog, May 18, 2017, http://www.rockymountainemployersblog.com/blog/2017/5/18/second-circuit-breathes-new-life-into-independent-contractor-relationships-finding-black-car-drivers-in-nyc-are-independent-contractors.

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