In an effort to clarify whether a worker is an independent contractor or an employee under the Fair Labor Standards Act (FLSA), the U.S. Department of Labor (DOL) recently announced a proposed rule to adopt a five-factor “economic reality” test. This test considers whether a worker is in business for themselves — that is, acting as an independent contractor — or is economically dependent on an employer for work and is therefore an employee.
This rule clarifies a few longstanding standards currently used by the DOL for Social Security purposes and to determine a company’s compliance with federal labor law. Like the “IRS test” used by the IRS to determine this same question for tax purposes, the rule employs a scale of degrees, in which the extent to which each factor is true or not can be judged on a spectrum, rather than the simple yes/no questions of the ABC test used in California’s AB-5 legislation. The proposed DOL rule asks many of the same questions as the IRS test, streamlined to five factors vs. 20, with an emphasis on the financial aspect of the worker-client relationship.
It is important for all freelancers to understand the regulations that may affect their ability