“The new “old” independent contractor standard to use starting in March of 2022"
Properly classifying workers as either “employees” or “independent contractors” is difficult even in the best of circumstances, but it certainly doesn’t help when every administrative agency (the Department of Labor (“DOL”) vs. the IRS), every individual state (California vs. Texas; Florida vs. Massachusetts; etc.), and every presidential administration (Obama vs. Trump; Trump vs. Biden) has a different interpretation of the rules, or even a different set of rules altogether.
The latest sticky wicket arose on March 14, 2022, when Judge Marcia Crone of the U.S. District Court for the Eastern District of Texas reinstated the Trump era’s “core factor” version of the DOL’s “economic realities” test. If you’re already lost, fear not; we are going to skip over all the contradictory interpretations of the law and focus exclusively on explaining the current legal standard for distinguishing between employees and independent contractors.
Courts have been instructed to immediately apply a bifurcated 5-factor test to determine whether a given worker is an employee, or an independent contractor. We say “bifurcated,” because while there are 5 factors in total, the analysis takes place in two steps. Depending on the outcome of step 1, step 2 might not even be necessary. It’s not as complicated as it sounds, we promise!
Step One: Consider the following Two Factors.
The nature and degree of control over the work. If an individual exercises significant control over how he/she gets work done, he/she is more likely to be considered an independent contractor.
Autonomy is key: in the textbook example, you tell independent contractors what needs doing by when, and that’s the last you see of them until the task is complete; in short, independent contractors use their professional expertise and judgment to accomplish assigned tasks, while employees follow orders.
Every instruction you issue is another point towards independent contractor status. Some common points courts look to for this factor are:
Do you set the putative employee/contractor’s hours (employee), or do you merely provide a deadline (contractor)?
Do you assign them work (employee), or do you offer them work (contractor)?
Do they request time off (employee, or do they inform you they’re modifying their schedule (contractor)?
This is a subtle but crucial distinction: can they refuse your instructions in favor of their preferred methods, provided they successfully accomplish the job? Think hard here, because most people reflexively insist “yes,” when the answer is actually “yes, but with obvious detrimental consequences,” which won’t pass muster under this factor.
Are they charge of his own methods? As in did they arrive with their own plan to accomplish the job (contractor), or are they merely executing your own plan (employee)?
The worker's opportunity for profit or loss based on initiative and investment. If a worker can adjust their earnings on their own initiative or through business investments and expenditures, he/she is likely an independent contractor.
If the putative employee/contractor works hard to improve your sales, posting flyers and showing up to networking events, do they end up with more personal profits when all is said and done? If yes, then this factor weighs heavily towards independent contractor; if no, then this factor weighs just as heavily in the opposite direction.
For example: if an employee at Dollar General works their proverbial rear end off advertising for the business, and – through social media savvy and pure grit – triples the customer base at their store, that doesn’t really help that individual go getter employee at all. Their hourly wage does not change depending on how many customers they service throughout their shift; their marketing efforts have earned them additional work, with no additional reward. In this scenario, we are dealing with an employee, because their success is only barely and tangentially tied to the success of the business itself.
This next point is absolutely crucial: the argument that workers ultimately benefit when their company succeeds does not apply here; we’re talking about immediate cause-and-effect, not long-term trends in working hours or annual raises. The less intervening factors between the putative employee’s/contractor’s actual performance and their earning potential, the more likely this factor will weigh towards independent contractor, as opposed to employee.
If both factors “1” and “2” above suggest the same classification – that is, if either both factors weigh towards “employee” or both factors weigh towards “independent contractor” – then you’re done. The analysis is complete, and you can be relatively certain you’ve properly classified your worker. If, however, the outcome of both factors disagree on what classification is appropriate, you must move on to step two.
Step two: Consider the following Three Additional Factors.
The amount of skill required for the work. If a worker has to deploy skills or training that is not provided by his/her employer, he/she is likely an independent contractor.
This factor means more or less exactly what it says: you do not train independent contractors, period. Contractors are hired precisely because they already possess the skills they need to complete the job.
Suffice it to say, any training beyond “here’s how you submit invoices” is a point toward employee status.
The degree of permanence of the working relationship between the worker and the potential employer. Employment arrangements that are expected to last for a specific period of time, or that are unpredictable, are more likely to be independent contracting relationships.
Independent contractors are not engaged indefinitely; you wouldn’t keep a plumber on payroll for months at a time. You engage an independent contractor to accomplish a specific task, and once that task is complete, the engagement ends.
That’s not to say you can’t engage a contractor again for similar tasks later – even immediately after the first task is complete – but the longer a putative employee/contractor remains consistently on payroll, the more likely you’re dealing with an employee.
Whether the work is part of an integrated unit of production (or the individual works under circumstances analogous to a production line). If a worker’s job is integral to the employer’s core business, then he/she is more likely an employee, not an independent contractor.
The law views independent contractors as professionals you bring in to provide a service which is essential to run your business, but not – strictly speaking – a part of your business. The easiest way to grasp this factor is by way of example:
Chiropractor runs a chiropractor office.
Chiropractor hires Jane Doe to perform chiropractic services.
This factor presumes that Jane Doe is an employee, because she’s providing the service for which the business exists (i.e., chiropractor). Conversely...
Chiropractor hires John Doe to install wooden floors.
The presumption is that John Doe is an independent contractor because Chiropractor’s business in no way relates to the service John Doe is providing (i.e., carpentry).
The odd-number of total factors is no coincidence. If step one didn’t resolve the question, then once you complete step two, it’s just a matter of counting which classification accumulated more factors. If 3 factors weigh towards employee, and 2 weigh towards independent contractor, you’re likely dealing with an employee; If 3 factors weigh towards independent contractor, and 2 weigh towards employee, you’re likely dealing with an independent contractor. It’s just that simple – except when it isn’t.
While this standard is relatively user-friendly – especially compared with previous iterations, or worse, the IRS vague 20-factor test – reasonable minds can certainly disagree on whether any given factor might weigh towards employee, or towards independent contractor. If, even after applying the “core factor” test above, you’re not 100% certain whether you’re dealing with an employee or an independent contractor, we are here to help as this is a fact intensive analysis. Please feel free to reach out to schedule a consult with us today with any questions.