DOL releases final worker status rule

The Department of Labor issued its long-awaited final worker status rule. The final rule adopts the proposed rule with few changes. The new rule becomes effective March 11.

At the outset, let’s be clear about what this rule doesn’t do:

• It doesn’t affect the IRS’ worker status test.
• It doesn’t codify the ABC test, which states (not the IRS) use to test workers’ status.
• It doesn’t affect any other federal agency’s definition of employees and independent contractors. But remember, under the various Memoranda of Understanding, other federal agencies may forward questionable classifications to the DOL.

The final rule was never intended to break a lot of new ground. Instead, it formalizes the six-part test, called the economic realities test, the U.S. Supreme Court began developing in the 1940s.

Key: The final rule retains the seventh, and wildcard, part from the proposed rule—additional factors (whatever they are), which may be relevant in determining whether workers are employees or independent contractors. While the DOL is keeping this intentionally vague, it also says it probably won’t be necessary in the majority of cases.

Ready for primetime

The DOL rearranged the six parts of this test in the final rule from how it presented them in the proposed rule. How these parts are presented isn’t relevant, since no single part is more important than another.

Regulatory language has also been updated to reflect the current economic realities and not the industrial realities of long ago, so more employers could be snagged with this more modern interpretation.

In keeping with how courts have interpreted the six-part test over the decades, the list of factors within each part is nonexclusive and the parts are weighed against one another.

Opportunity for profit or loss depending on managerial skill

This is unchanged from the proposed rule.

What this may mean for gig workers: Algorithms dictating workers’ availability, their pay and other economic conditions may, according to the DOL, leave them unable to negotiate or make any managerial decisions. This would lead a court to determine they’re employees, but since no factor is greater than another, they could prove they were independent contractors.

Investments by the worker and the potential employer

Under the final rule, costs unilaterally imposed by an employer on workers aren’t capital or entrepreneurial in nature. This is the opposite of the proposed rule.

The final rule also explains that workers’ and employers’ investments in the overall business should be weighed. Workers’ investments, for example, don’t need to equal employers’ investments on a dollar-for-dollar basis, but should be compared to determine whether workers are making similar types of investments, even if on a smaller scale, to suggest they’re operating independently.

If, for example, an employer picks up the cost of malpractice insurance, the workers have no meaningful say in the arrangement. On the other hand, if workers shop around and buy their own malpractice insurance, it’s a capital or entrepreneurial investment, albeit on a much smaller scale.

Degree of permanence of the work relationship

This is also unchanged from the proposed rule, except the DOL acknowledges that there are benefits to long-term relationships between independent contractors and their clients.

Nature and degree of control

Your right to control the work, and not your actual control, is always the lynchpin (and for the IRS, too). The final rule leaves this analysis undisturbed, but makes the following clarifications:

• Control may be via technology (i.e., bossware).
• Actions taken by a potential employer for the sole purpose of complying with a specific federal, state or local law or regulation aren’t indicative of control. Actions taken beyond compliance may be indicative of control.

Extent to which the work performed is an integral part of the potential employer’s business

This factor is unchanged from the proposed rule.

Skill and initiative

This factor is also unchanged from the proposed rule.