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Five-Factor Independent Contractor Rule Reinstated

The federal standard for determining independent contractor status has been on a pendulum since a Trump administration rule (Rule) was established that made it easier for employers to classify workers as independent contractors under a five-factor test. As we previously reported, the Trump era Rule was set to take effect in March 2021, but it was officially withdrawn by the U.S. Department of Labor (DOL), under the Biden administration, on May 5, 2021. This resulted in a return to the prior DOL standard (“the totality of the circumstances”) for classifying independent contractors which makes it more difficult for employers to establish independent contractor status. The withdrawal of the 2021 Rule, ultimately, resulted in a lawsuit by a coalition of businesses against the DOL to have the five-factor test reinstated.

On March 14, 2022, a federal court in Texas ruled in favor of the businesses, citing that the Biden administration’s complete withdrawal of the Rule without considering any possible changes to the five-factor test and without appropriate notice and comment periods violated the federal law governing agency rulemaking. As a result of the court’s ruling the five-factor test is reinstated.

The five-factor test considers the following:

  1. The nature and degree of the worker’s control over the work;
  2. The worker’s opportunity for profit or loss based on initiative, investment, or both;
  3. The amount of skill required for the work;
  4. The degree of permanence of the working relationship between the individual and the potential employer; and
  5. Whether the work is part of an integrated unit of production.

Next Steps for Employers

Employers may be shielded from DOL misclassification lawsuits dating back to March 8, 2021, with the five-factor test back in effect. It should be noted that the DOL could appeal the decision to the 5th Circuit Court of Appeals. Alternatively, the DOL can issue a new rule to replace the current Rule, but this is a lengthy process and would not be expected to be accomplished swiftly.

President Biden has stated his preference for use of the “ABC test” for the FLSA and all other federal labor, employment and tax laws which considers whether the worker is free from the control and direction of the hiring entity in connection with the performance of the work; whether the worker performs tasks that are outside the usual course of the hiring entity’s business; and whether the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

Multistate employers should also keep in mind that some states have specific tests to establish independent contractor status which have more stringent requirements than those under federal law.

Employers are encouraged to consult with their legal counsel and/or tax professional for additional guidance on federal and state laws regarding worker classification.

HR Works, headquartered in Upstate New York, is a human resource management outsourcing and consulting firm serving clients throughout the United States for over thirty years. HR Works provides scalable strategic human resource management and consulting services, including: affirmative action programs; benefits administration outsourcing; HRIS self-service technology; full-time, part-time and interim on-site HR managers; HR audits; legally reviewed employee handbooks and supervisor manuals; talent management and recruiting services; and training of managers and HR professionals.