Exploring the Economic Reality Test: Skill and Initiative

The third factor in the economic reality test, Skill and Initiative, plays a key role in determining whether a worker is classified as an independent contractor or an employee. This factor examines the degree to which a worker’s specialized skills and business acumen contribute to their success, underscoring their independence or dependency on an employer.

What Does “Skill and Initiative” Mean?

Skill and initiative evaluate whether a worker:

1. Relies on Specialized Expertise:
   • Employee: May perform tasks requiring general training provided by the employer but not necessarily specialized or unique expertise.
   • Independent Contractor: Brings distinct skills or expertise that are valuable to specific projects. For example, a freelance software developer hired to create a custom application demonstrates a high degree of skill.
2. Exhibits Business Judgment:
   • Employee: Follows tasks and processes as directed by the employer, with limited decision-making authority.
   • Independent Contractor: Exercises initiative by identifying opportunities, selecting projects, negotiating rates, and making decisions that affect their work outcomes and business growth.
3. Engages in Entrepreneurial Activities:
   • Employee: Works exclusively for one employer without the autonomy to pursue additional business ventures.
   • Independent Contractor: Operates as a business entity, actively seeking clients and managing operations.

Practical Examples of Skill and Initiative

1. A Marketing Consultant:
   • Employee: Executes campaigns using strategies pre-defined by their employer, adhering to company guidelines.
   • Independent Contractor: Develops and implements unique marketing strategies for various clients, choosing tools and methods based on their expertise.
2. A Carpenter:
   • Employee: Performs carpentry tasks as assigned by the employer, using tools and materials provided by the company.
   • Independent Contractor: Provides custom carpentry services, sourcing materials, setting prices, and designing projects independently.

Why Does Skill and Initiative Matter?

This factor highlights the distinction between an individual operating as an autonomous business and a worker functioning within the confines of an employer’s direction. Independent contractors thrive on their specialized skills and ability to make business-oriented decisions, while employees rely on the structure and support of their employer.

Conclusion

The “Skill and Initiative” factor underscores the entrepreneurial spirit that defines independent contractors. By recognizing the importance of specialized skills and proactive decision-making, businesses can make informed worker classification decisions that promote compliance and fairness.

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 further details on worker classification and the economic reality test, visit the official DOL guidelines here.