Employee vs. Independent Contractor Rule Changes – Department of Labor

 

The independent contractor designation will be under increased scrutiny for businesses starting on March 11, 2024 by the federal US Department of Labor (pending legal challenges). The new federal rule establishes a six-factor test to determine employee vs. independent contractor status which includes:

1. opportunity for profit or loss depending on managerial skill; 
2. investments by the worker and the potential employer; 
3. degree of permanence of the work relationship; 
4. nature and degree of control; 
5. extent to which the work performed is an integral part of the potential employer’s business; and 
6. skill and initiative. 

*Additional factors may be relevant if it helps determine whether the worker is “economically dependent” on the potential employer for work. More on that later.

The legal term for this new analysis is the “totality of the circumstances” analysis, also sometimes termed in part the “economic reality” analysis. 

Let’s dig deeper into what the federal analysis actually looks like with examples for healthcare companies:

 

The Six Factors of The Economic Reality Test – A Healthcare Perspective

To analyze if a worker is an independent contractor or employee under the new rule, we will explore each factor in further detail using common healthcare business relationships.

 

Factor One: Opportunity for Profit or Loss Depending on Managerial Skill

Does the worker have opportunities for profit or loss based on managerial skill that affect the worker’s economic success or failure? Managerial skill can include initiative or business expertise or judgment. The following facts, among others, can be relevant in the determination:

• Whether the worker determines or can meaningfully negotiate the charge or pay for the work provided;
• Whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed;
• Whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and
• Whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space.

If a worker has no opportunity for a profit or loss, then this factor suggests that the worker is an employee. Some decisions by a worker that can affect the amount of pay that a worker receives, such as the decision to work more hours or take more jobs when paid a fixed rate per hour or per job, generally do not reflect the exercise of managerial skill indicating independent contractor status under this factor.

Examples: Opportunity for Profit or Loss Depending on Managerial Skill

• BAD: A worker for a mental health provider accepts all patients as decided by the one company they have an independent contractor agreement with. The worker does not independently choose or reject patients, ask for additional work, or reduce her workload at her own will; rather the Company decides. The worker spends all of their available work week, around 30-40 hours per week, working with the Company’s patients.  The worker also does not advertise her services on the internet or introduce herself at social and networking events as an independent worker, but rather a “mental health professional at Company”. In fact, the worker is prominently displayed on the Company’s website without any clear disclaimer that the worker is an independent contractor.  The worker does however regularly agree to work additional hours to earn more money due to a legal fee split arrangement in the independent contractor agreement. In this example, the worker does not exercise managerial skill that affects their profit or loss. Rather, their earnings may change based on the work available and their willingness to work more. Because of this lack of managerial skill affecting their opportunity for profit or loss, these facts indicate employee status under the opportunity for profit or loss factor.
• GOOD: In contrast, a mental health professional worker provides therapy services directly to patients through her OWN business entity – a Professional Limited Liability Company, and also happens to work for multiple different mental health Companies as an independent contractor in a business-to-business contractual relationship. The worker produces their own business advertising online and with print brochures and business cards with the worker’s own business name. The worker negotiates contracts, and decides which patients to serve and which to reject from the worker’s schedule. In addition, the worker has impressive business acumen and decides when and whether to hire helpers to assist with the work, including a recent administrative employee that helps answer phones, do scheduling and other administrative work. In fact, the worker has hired another mental health professional who has the ability to provide services through her contracts, as there is a contract clause allowing “assignment” of duties.  This mental health professional worker exercises managerial skill that affects their opportunity for profit or loss, in a classic business-entity example. These facts indicate independent contractor status under the opportunity for profit or loss factor.

Factor Two: Investments by the Worker and the Potential Employer

Are any investments by a worker capital or entrepreneurial in nature? The following facts, among others, can be relevant in that determination:

• Costs to a worker of tools for a specific job and costs that the employer imposes on the worker are not capital or entrepreneurial investments that indicate independent contractor status. Investments that are capital or entrepreneurial in nature and indicate independent contractor status generally support an independent business and serve a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach.
• Additionally, the worker’s investments should be considered on a relative basis with the potential employer’s investments in its overall business. The worker’s investments do not have to be equal to the potential employer’s investments and should not be compared only in terms of the dollar values of the investments. The focus should be on whether the worker makes similar types of investments as the employer (even if on a smaller scale) or investments of the type that would allow the worker to operate independently in the worker’s industry or field. Such investments by the worker in comparison to the employer weigh in favor of independent contractor status, while a lack of investments that support an independent business indicate employee status.

Examples: Investments by the Worker and the Potential Employer

• BAD: A nurse practitioner serving as a medical director providing injectable supervision services for a larger medical spa company, largely in a remote capacity. The medical spa provides electronic health record software, a computer, a HIPAA secure email, office space, and all the equipment and supplies for the medical director or her supervisees to do procedures under her remote supervision and delegation of services. The medical spa company invests in marketing and finding patients and maintains a central office from which to manage and provide services. The medical director occasionally uses her own preferred medical record keeping software and email for dealing with the medical spa. In this scenario, the medical director’s relatively minor investment in supplies is not capital in nature and does little to further a medical director’s business beyond completing specific tasks. These facts indicate employee status under the investment factor.
• GOOD: A medical director occasionally completes specialty training and medical record reviews for the same medical spa. The medical director purchases her own electronic health records software, website, computer, needles, malpractice insurance, procedure chemicals, and rents their own space. The medical director also spends money to market their services so they can be a medical director for multiple different medical spas and also provides consulting to various non-related medical spa professionals.  These types of investments support an independent business and are capital in nature (e.g., they allow the worker to do more work and find new clients). These facts indicate independent contractor status under the investment factor.

Factor Three: Degree of Permanence of the Work Relationship

Is the work relationship indefinite in duration, continuous, or exclusive of work for other employers? That would weigh in favor of the worker being an employee. Is the work relationship indefinite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple businesses? That would weigh in favor of the worker being an independent contractor.

• This may include regularly occurring fixed periods of work, although the seasonal or temporary nature of work by itself would not necessarily indicate independent contractor classification.
• Where an individual cannot perform work on a permanent basis due to operational characteristics that are unique or intrinsic to particular businesses or industries and the workers they employ, then this factor would not necessarily indicate independent contractor status unless the worker is exercising their own independent business initiative.

Examples: Degree of Permanence of the Work Relationship

• BAD: A medical doctor has performed good health history (good faith exam) reviews for a multi-disciplinary clinic continuously for several years as an independent contractor. The independent contractor agreement was signed four years ago and does not contain a provision about the end of the term of the arrangement. The medical doctor completes the reviews as decided by the clinic, depending on the patient type and procedure. The medical doctor is the only one who performs all the medical record reviews for the clinic, and the clinic has predictable recurring patient work – the treatment programs follow a very predictable timeline with expected clinical touch-points with the patients. The relationship between the doctor and the clinic is characterized by a high degree of permanence and exclusivity as the doctor does not work for other clinics. In fact, the doctor enjoys to primarily work from home as she approaches a much deserved retirement. These facts indicate employee status under the permanence factor.
• GOOD: A medical doctor has performed specialty training on a specific procedure she has mastered, intermittently for a medical clinic over the past three years for certain high risk patients. The doctor markets their specialty services to multiple medical clinics and even private individuals, and other medical doctors, and turns down work from the medical clinic for any reason, including because the medical doctor is too busy with other medical work. The medical doctor is invited to speak at conferences where she markets her specialty training to many other medical clinics who solicit her to try to work with them. The medical doctor has a sporadic or project-based non-exclusive relationship with the medical clinic. These facts indicate independent contractor status under the permanence factor.

Factor Four: Nature and Degree of Control

Does the potential employer have control, including reserved control over the performance of the work and the economic aspects of the working relationship? Reserved control means the employer has the right to control even if they do not actually exercise the control. An example of reserved control is if an employer reserves the right to discipline a worker for declining assignments.

Facts relevant to the potential employer’s control over the worker include whether the potential employer:

• sets the worker’s schedule;
• supervises the performance of the work;
• explicitly limits the worker’s ability to work for others, or places demands or restrictions on workers that do not allow them to work for others or work when they choose;
• uses technological means to supervise the performance of the work (such as by means of a device or electronically);
• reserves the right to supervise or discipline workers; or
• controls economic aspects of the working relationship, such as the prices or rates for services and the marketing of the services or products provided by the worker.

Actions taken by the potential employer for the sole purpose of complying with a specific, applicable federal, state, tribal, or local law or regulation are not indicative of control. However, actions taken by the potential employer that go beyond compliance with a specific, applicable federal, state, tribal, or local law or regulation and instead serve the potential employer’s own compliance methods, safety, quality control, or contractual or customer service standards may be indicative of control. More facts that show control by the potential employer indicate employee status; more facts that show control by the worker indicate independent contractor status for this factor.

Examples: Nature and Degree of Control

• BAD: A registered nurse provides nursing care for Alpha House, an assisted living facility. The nursing home sets the work schedule with input from staff regarding their preferences and determines the staff assignments. Alpha House’s policies prohibit nurses from working for other nursing homes while employed with Alpha House to protect its residents (although the contract does not contain a non-compete). In addition, the nursing staff are supervised by regular check-ins with managers, but nurses generally perform their work without direct supervision. While nurses at Alpha House work without close supervision and can express preferences for their schedule, Alpha House maintains control over when and where a nurse can work and whether a nurse can work for another nursing home. These facts indicate employee status under the control factor.
• GOOD: Another registered nurse provides specialty movement therapy to residents at Beta House. The nurse maintains a website and was contacted by Beta House to assist its residents. The nurse provides the movement therapy for residents on a schedule agreed upon between the nurse and the resident, without direction or supervision from Beta House, and sets the price for services on the registered nurses’ website where she has a fee schedule for her services. In addition, the nurse provides therapy sessions to residents at Beta House as well as other nursing homes in the community at the same time. These facts—that the nurse (1) markets their specialized services to obtain work for multiple clients, (2) is not supervised by Beta House, (3) sets their own prices, and (4) has the flexibility to select a work schedule—indicate independent contractor status under the control factor.

Factor Five: Extent to Which the Work Performed is an Integral Part of the Potential Employer’s Business

Is the work performed an integral part of the potential employer’s business?

• If the work performed by a worker is critical, necessary, or central to the potential employer’s principal business, then this factor indicates that the worker is an employee.
• If the work performed by a worker is not critical, necessary, or central to the potential employer’s principal business, then this factor indicates that the worker is an independent contractor.

This factor does not depend on whether any individual worker is an integral part of the business, but rather whether the function they perform is an integral part of the business.

Examples: Extent to Which the Work Performed is an Integral Part of the Potential Employer’s Business

• BAD: A medical spa device manufacturer creates a micro needling device that it sells to medical spas. The manufacturer pays workers to assemble the device in a plant when product comes in from abroad. Because a necessary part of creating the devices is the manufacturing line, the manufacturing line workers are integral to the company’s business. These facts indicate employee status under the integral factor.
• GOOD: Alternatively, the same manufacturer pays a healthcare law firm to provide limited general counsel legal support, including filing its business filings and consulting on legal contracts as they come about in the course of business dealings. This legal support is not critical, necessary, or central to the principal business of the manufacturer (creating micro needling devices), thus the law firm’s work is not integral to the business (although most lawyers would disagree!) Therefore, these facts indicate independent contractor status under the integral factor.

Factor Six: Skill and Initiative

Does the worker use specialized skills to perform the work and do those skills contribute to business-like initiative?

• This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the potential employer to perform the work.
• Where the worker brings specialized skills to the work relationship, this fact is not itself indicative of independent contractor status because both employees and independent contractors may be skilled workers. It is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.

Examples: Skills and Initiative

• BAD: A highly skilled nurse anesthetist provides anesthesia for a medical clinic that also provides medical spa services. The nurse anesthetist does not make any independent decisions at the job site beyond what it takes to put the patient under anesthesia. The nurse anesthetist does not determine the sequence of patient procedures, order additional materials, think about patient pricing, or use their nursing skills to obtain additional jobs, and is told what work to perform and where to do it. In this scenario, the nurse anesthetist, although highly skilled technically, is not using those skills in a manner that evidences business-like initiative. These facts indicate employee status under the skill and initiative factor.
• GOOD: A highly skilled nurse anesthetist provides open-market specialty anesthesia services, such as anesthesia for high-ticket painful medical spa procedures, for a variety of area medical clinics and medical spas and surgery centers. The nurse anesthetist uses these skills for marketing purposes, to generate new business, and to obtain work from multiple companies. The nurse anesthetist is not only technically skilled, but also uses and markets those skills in a manner that evidences business-like initiative. These facts indicate independent contractor status under the skill and initiative factor.

Additional Factors

Additional factors that answer the question of whether a worker is economically dependent on an employer may be relevant. Factors that do not help answer this question, such as whether an individual has alternate sources of wealth or income, are not relevant.

To further complicate the matter, the multi-factor test is still weighed by the government or legal system and no one factor is necessarily determinative. Minnesota has separate legal guidance in case law that is similar, but not identical, to federal law. Whether state or federal law applies requires a legal analysis for your specific situation.  In Minnesota, there are only five factors employee vs. independent contractor status in Minnesota, some of which are similar to federal rules:

1. the right to control the means and manner of performance; (Nature and Degree of Control -similar)
2. the mode of payment; (Opportunity for Profit or Loss Dependent on Managerial Skill – similar)
3. the furnishing of materials or tools; (Investments by the Worker and the Potential Employer – similar)
4. the right to control the premises where the work is done; and  (Nature and Degree of Control -similar)
5. the right of the employer to discharge. (Nature and Degree of Control -similar)

Businesses should engage an attorney to not only evaluate the written independent contractor agreement, but also the actual unwritten behind-the-scenes behavior and control the Company exerts over the Contractor which help answer the multi-factor legal analysis.