The new rule relies upon a six-factor totality-of-the-circumstances, economic reality test that has been used by federal courts in deciding whether to classify a worker as an employee or independent contractor:

• Opportunity for profit or loss
  • Can the worker negotiate labor rates?
  • Can the worker reject an assignment without risk of losing employment?
  • Does the worker hire other workers?
• Nature and degree of control
  • Does the worker create their own work schedule?
  • Is the worker supervised?
• Degree of permanence of the work relationship
  • Is the work contract project-based or indefinite?
• Work performed as an integral part of the potential employer’s business
  • Is the work critical to the employer’s principal area of business?
• Specialized skill and initiative
  • Does the worker possess specialized skills or rely on employer training?
• Investments by the worker and employer
  • Is the worker making capital investments that support business growth? (marketing, renting office space, purchasing software, etc.)

The new rule replaces a narrower test for employee classification established in 2021 under the Trump administration that concentrated mainly on two factors, namely, the nature and degree of control and opportunity for profit or loss possessed by the worker. For the new rule, no one factor is weighed more heavily than the others.

Guidance for Employers

It’s important to note that classification as an employee is a presumption employers have the burden of overcoming if they wish to classify workers as contractors. Because the new rule narrows independent contractor status, employment agreements should be reviewed for misclassification risks that can result in costly exposure to wage-and-hour violations and other civil liabilities.

Significantly, the Department’s final rule does not preempt state and local laws that implement different standards for employee classification. California and other states still employ the more stringent “ABC test”. The ABC test focuses on whether the work performed is done: (A) without the direction and control of the employer; (B) outside the usual course of the employer’s business; and (C) by someone who has his or her own independent business or trade doing that kind of work. Employers are expected to comply with all federal, state, and local laws. If your business needs legal assistance in avoiding employee misclassifications, please contact us.