Exploring the Economic Reality Test: Permanency of the Relationship

The economic reality test includes an important factor known as Permanency of the Relationship. This factor evaluates whether the nature of the working relationship suggests a long-term or indefinite commitment indicative of an employee, or a more temporary and project-based arrangement characteristic of an independent contractor. Let’s break this down further.

What Does “Permanency of the Relationship” Mean?

Permanency of the relationship focuses on whether the worker is engaged:

1. For Ongoing Work:
   • Employee: Typically hired for an indefinite period and performs ongoing roles central to the employer’s operations.
   • Independent Contractor: Often engaged for a specific project or a defined, short-term duration.
2. Under Renewable Contracts:
   • Employee: May not require regular contract renewal as they are permanently part of the employer’s workforce.
   • Independent Contractor: Frequently operates under renewable or one-time agreements tied to project milestones or completion.
3. Continuity of Work:
   • Employee: Their role generally implies continuity in their working relationship unless terminated by the employer.
   • Independent Contractor: The working relationship typically ends upon project completion, with no assumption of future engagements.

Practical Examples of Permanency of the Relationship

1. A Software Developer:
   • Employee: Works indefinitely for a tech company, contributing to multiple software projects as assigned.
   • Independent Contractor: Hired to develop a specific application with a clear deliverable and timeline, ending their engagement once the project is complete.
2. A Construction Worker:
   • Employee: Regularly employed by a construction firm for various projects over an extended period.
   • Independent Contractor: Engaged to construct a single building or complete a specific phase of construction, with no expectation of further work.

Why Does Permanency of the Relationship Matter?

This factor is significant because it helps determine the level of dependency between the worker and the employer. Employees often have an expectation of continued employment and rely on the employer for ongoing income. Independent contractors, however, manage their own work and income by seeking out projects and clients independently.

Conclusion

The “Permanency of the Relationship” factor underscores the importance of distinguishing between ongoing employment and project-based work. By carefully evaluating this aspect, businesses can make informed worker classification decisions that align with legal standards and avoid costly errors.

Need more information? Go here to start at the beginning of this blog series on understanding the difference between an employee and independent contractor.

For more information on the DOL’s worker classification guidelines, visit the official document here.