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Independent Contractor Classification

Jerry M. Cutler

Independent Contractor Classification
Milko via Getty Images

Issues of income inequality, and disparities between individuals with regard to employment rights, have increasingly drawn legislative and regulatory scrutiny. One area of focus has been the use of “independent contractor” classifications. Because independent contractors are frequently paid less and receive fewer economic benefits than employees (e.g., retirement, health insurance, unemployment insurance, workers’ compensation), there is a perception that the designation of workers as independent contractors undermines fundamental principles of equity and fairness, along with basic income and benefit protections.

In determining whether workers are employees or independent contractors, courts have typically applied two basic tests: “economic realities” and “common law.” Some critics have claimed that these tests fail to protect the rights of workers and foster social injustice by adversely impacting employees of color and immigrant workers. Criticism has also been leveled at regulatory efforts to clarify independent-contractor issues.

The Biden administration has advocated for a different approach. The president’s plan for “Strengthening Worker Organizing, Collective Bargaining, and Unions” states that employer “misclassification of [] workers as independent contractors deprives these workers of legally mandated benefits and protections.” The Biden plan posits that this misclassification has been made possible by legal tests that provide too much discretion to employers, and not enough protection to workers. It points favorably to states that have adopted the stronger three-prong “ABC” test to distinguish employees from independent contractors.

The ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring organization establishes that the worker satisfies each of the following three conditions: a) the worker is free from the control and direction of the organization in the performance of the work; b) the worker performs work that is outside the usual course of the organization’s business; and c) that the worker is customarily engaged in an independently established occupation or business performing the same as the work being performed for the organization.

The ABC test is more stringent than either the “economic reality” or “common law” test adopted by the courts and federal regulatory agencies. In this regard, under either the economic reality and common-law test, no single factor exempts a worker from independent--contractor status. By contrast, any one of the factors in the ABC test precludes a worker from being classified as an independent contractor. Adopting the ABC test is therefore likely to result in employment status for many workers currently classified as independent contractors.

Several states have already adopted a version of the ABC test. In New York, for example, the state senate has proposed legislation amending state labor laws to tighten the definition of independent contractors. If enacted, the legislation would classify workers as employees, and not as independent contractors, unless each of the following conditions is met: 1) The individual is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; 2) The individual performs work that is outside the usual course of the hiring entity's business; and 3) The individual is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

In the meantime, regulatory efforts to address independent-contractor issues continue at the federal level. To this end, the U.S. Department of Labor on June 3, 2022, announced plans to restart the rulemaking process with the hope of ensuring that workers are correctly classified, and that they receive protections under the Fair Labor Standards Act as warranted. More developments on this front are certain to follow.