The Department of Labor recently made key changes to its rules in a way that will affect the oil and gas sector. The new rule rescinds a Trump Administration rule that had simplified the process of classifying workers as independent contractors. In its place, the DOL returned to the previous, complex and flexible “Economic Realities Test” which requires an employer to analyze the totality of the circumstances of an individual’s engagement under the following factors:
- The worker’s opportunity for profit or loss depending on managerial skill;
- The investments by the worker and the employer;
- The degree of the permanence of the work relationship;
- The nature and degree of the employer control;
- The extent to which the work performed is an integral part of the employer’s business; and
- The worker’s use of skill and initiative.
This worker-friendly change will complicate the employee classification process, and employers must prepare for the uncertainty and potential liabilities it will bring.
The “New” Test
Employers will now be required to undertake a complex analysis focusing on the six factors above to determine whether a worker should be classified as an “employee” or an “independent contractor.” This test generally favors an “employee” finding and requires an employer to decide whether the worker is essentially working for themselves, and thus properly classified as an independent contractor, or dependent on the employer for work, and thus properly classified as an employee.
Previously, under the Trump rule, the focus of the analysis centered upon the “core factors” of:
- The nature and degree of control over the work; and
- The worker’s opportunity for profit or loss based on initiative with the remaining factors serving as additional guidance when these core factors did not point to the same classification.
This test favored employers and made an employer’s decision to classify a worker as an independent contractor much easier and more defensible.
Now, each of the six factors are to be given equal weight under the totality of the circumstances when determining a worker’s appropriate classification. Employers must juggle these six “realities” of the relationship to form their best guess at a worker’s appropriate classification. This approach complicates the analysis and allows for multiple interpretations of a worker’s proper classification, so employers will find it more difficult to avoid suits for misclassification under federal wage and hour rules. Note, the new test applies only to the DOL’s interpretation of the Fair Labor Standards Act, and you must remain cognizant of state regulations and interpretations of your state’s wage and hour rules.
What Employers Need to Know
Employees are entitled to protections, like minimum wage guarantees and overtime protections, which independent contractors are not. The new Economic Realities Test gives workers more avenues to challenge their classification and will result in increased litigation. To limit these potential liabilities and best prepare for the newly complexified classification process, employers should consider the following:
- Analyze your workforce:
- Determine which workers or categories of workers may now be at risk of being classified as employees and take appropriate actions such as reclassifying them.
- Are your policies up to date?
- Review policies, procedures, and handbooks to ensure compliance with the Economic Realities Test.
- Conduct necessary training:
- Ensure that those in human resources and positions with hiring authority are trained on the new test and are up to date on best practices.
- Seek legal counsel:
- Work with counsel to ensure compliance with the new rule and to conduct these analyses to avoid potential errors and the associated liabilities.
If you have questions regarding these or other employment-related questions, please contact Ruth Ann Daniels, head of Gray Reed’s Labor and Employment Practice Group.
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