The actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible. For example, a person’s theoretical ability to negotiate prices or work for a competitor is less relevant than whether in reality the person is able to do so.
The Labor Department issued the regulations to “promote certainty for stakeholders, reduce litigation, and encourage innovation in the economy,” in light of changing business operations and the gig economy.”
The regulations clarify when the employment relationship exists for federal law purposes, employers must comply with the Fair Labor Standards Act and other federal laws.
But employers also must comply with state law, which can create a conflict in the analysis.
Last year, Virginia enacted legislation whereby individuals who perform work for an employer are presumed to be an employee unless that individual is properly classified as an independent contractor under the IRS’ multifactor test. This test is different from the economic realities test applied by the Labor Department.
The Virginia law provides for private rights of action and fines/taxes on employers that misclassify employees.
The contradiction in tests between federal and state law will likely add confusion to employers in properly classifying individuals who perform work for them.