5/21/25 Employee vs. Independent Contractor: The Economic Reality Test Is Back
May 21, 2025
By Becky Zuschlag and Xavie Davenport
On May 1, 2025, the US Department of Labor’s Wage and Hour Division (“DOL WHD”) released a field assistance bulletin providing guidance to its field staff for determining employee versus independent contractor status when enforcing the Fair Labor Standards Act (“FLSA”). The new guidance instructs DOL investigators against using the Biden administration’s 2024 Final Rule on independent contractor classification. Instead, the bulletin explains, the WHD will rely on the “economic reality” test, as outlined in Fact Sheet #13, and Opinion Letter FLSA2019-6, when enforcing the FLSA, though the guidance does note that, “until further action is taken [by the DOL], the 2024 [Final] Rule remains in effect for purposes of private litigation[.]”
The 2024 Final Rule went into effect on March 15, 2024, and provided an employee-friendly six-factor test, also known as the “totality of the circumstances” to determine employee versus independent contractor status. Each factor was to be weighed equally, thus making it difficult for employers to appropriately classify their employees.
The economic reality test considers various factors, with the goal of the test being to determine whether the worker is economically dependent on the employer, and therefore an employee, or in business for themselves, and thus an independent contractor. Some of the factors considered are listed below:
The worker’s opportunity for profit or loss,
Investments by the worker in facilities and equipment,
Permanence of the work relationship,
Nature and degree of control by the employer,
Whether the work performed is integral to the employer’s business,
Skill and initiative required in market competition required for success of the worker, and
The degree of independent business organization and operation by the worker.
The economic reality test reflects a longstanding interpretation of the employee versus independent contractor distinction, focusing on the economic dependence of the worker. Whether a worker is economically dependent on the employer is a fact-specific inquiry and will vary by each working relationship. Economic dependence of a worker is more than reliance on a paycheck. A worker is typically considered dependent if they are unable to work on their own terms or are operating for their employer as a united economic entity. On the other hand, an economically independent worker is typically one who possesses more control over their work and may function as a separate economic entity. If the answers to the above factor test lean toward the worker being economically independent, the worker may be an independent contractor. In contrast, if the factors lean toward the worker being economically dependent, this suggests a traditional employment relationship.
While the guidance from the DOL is directed to its investigators, employers subject to the FLSA should be aware of the change to the rule DOL investigators will apply should an investigation occur. However, employers must also ensure that they meet the test outlined in the 2024 Final Rule given private litigation will still proceed under this rule. Additionally, Oregon’s various regulatory agencies use their own legal tests when determining an individual’s employee or independent contractor status.
When analyzing a worker’s employment status, it is important to understand the distinction between an employee and an independent contractor because the protections of the FLSA, and other employment laws, apply to employees but not to independent contractors. Now is a good time for employers to review how their employees are classified to ensure compliance with applicable law, regulations, and the recent DOL guidance. When in doubt, however, it is always safe to classify a worker as an employee.
We are here to help. Please contact Becky Zuschlag at bzuschlag@barran.com or 503-276-2151, or your regular Barran Liebman attorney for assistance in reviewing your employment compliance and ensuring your employees are classified appropriately.