This post is a summary of a more detailed Client Alert prepared by Gray Reed’s labor and employment practice group.

Recall our recent post on the Department of Labor’s new “Economic Realities Test” for classifying specialized contractors and consultants as either employees or independent contractors. The new rules make the compliance minefield much riskier. The DOL has now provided guidance on how it will apply the Test.

The prior post discussed the six factors to assess if a worker is economically dependent on the company (an employee) or truly in business for themselves (a contractor).

The most critical clarifications from the DOL involve analyzing:

  • the nature of the investments made,
  • the degree of control exerted, and
  • whether the worker’s skills involve entrepreneurial initiative.

Investments: The DOL will look at qualitative similarity rather than just dollar amounts. For example, a company man providing his own specialized tools and equipment could be viewed as making a similar investment in the company, even if the company’s investment is higher.

Degree of Control:  The DOL acknowledges operators, material and equipment providers, landmen and others may need to exert certain control to comply with industry regulations without making the worker more likely to be classified as an employee. But exceeding what regulations require, such as excessive monitoring or approval processes, could signal an employment relationship.

Skill and Initiative: The DOL focuses on whether contractors market their skills to different businesses. An expert deployed to work solely for one company wouldn’t indicate contracting, while those marketing their skills more broadly would.

Ultimately: The test analyzes overall economic dependence. Contractors must be truly in business for themselves rather than relying on and being controlled by one company as their main revenue source.

Employer: Take a close look at your contractor relationships and honestly assess their entrepreneurial independence. Are they building their own business and client base, or are they economically reliant on the company?

Worker: You should do the same.

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