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What Employers Need to Know About the Department of Labor's Withdrawal of the Independent Contractor Rule

On May 5, 2021, the United States Department of Labor (DOL) withdrew the Independent Contractor Rule which had been adopted by the Trump Administration which would have made it easier for employers to categorize individuals as independent contractors as opposed to employees.

Overview

The Fair Labor Standards Act (FLSA) requires all employers to pay non-exempt employees at least the federal minimum wage for every hour worked in a non overtime work week. In an overtime work week, with respect to all hours worked in excess of 40 hours in a work week, covered employers must pay a non exempt employees at least one and a half times the employee’s regular rate.

The Supreme Court has repeatedly emphasized that the test to be applied to determine whether an individual is an employee or independent contractor under the FLSA is one of “economic reality.” Under this test, the technical label of a worker as an employee or an independent contractor does not drive the analysis. Rather, it is the economic realities of the relationship between the worker and the employer that are determinative.

The Trump Administration’s Independent Contractor Rule

On January 7, 2021 (the “January Rule”), the DOL published a final rule, with an effective date of March 8, 2021, which provided a new generally applicable interpretation of employer and independent contractor status under the FLSA. This rule would have applied an economic dependence test under which the worker is considered an employee if that worker is economically dependent on the employer for work, and as an independent contractor if that worker is in business for himself or herself.

Under the January rule, five economic factors would have been considered, two of which were designated as “core factors” that would have carried greater weight in this analysis. The first core factor was the nature, degree, and control of the work which the employer would have over the work performed. The second core factor was the worker’s opportunity for profit and loss.

The DOL’s Withdrawal of the January Rule

The DOL withdrew the January Rule for various reasons, including the following:

  • The rule was in tension with the FLSA’s text and purpose, as well as relevant judicial precedent.
  • The rule’s prioritization of two “core factors” for determining employee status under the FLSA would have undermined the longstanding balancing approach of the economic realities test and court decisions requiring a review of the totality of the circumstances related to the employment relationship.
  • The rule would have narrowed the facts and considerations comprising the analysis of whether a worker is an employee or an independent contractor, resulting in workers losing FLSA protection.

Secretary of Labor Marty Walsh, in explaining the withdrawal, emphasized the concern for protecting employees: “By withdrawing the Independent Contractor Rule, we will help preserve essential worker rights and stop the erosion of worker protections that would have occurred had the rule gone into effect . . . too often, workers lose important wage and related protections when employers misclassify them as independent contractors. We remain committed to ensuring that employees are recognized clearly and correctly when they are, in fact, employees so that they receive the protections the Fair Labor Standards Act provides.”

Determining the Economic Realities of a Worker Relationship

The Supreme Court, on a number of occasions, has indicated that there is no single rule or test for determining whether an individual is an independent contractor or an employee for purposes of the FLSA. Among the factors which the Supreme Court has considered significant are the following:

  1. The nature and relative degree of control by the employer and employee.
  2. The alleged contractor’s opportunities for profit and loss.
  3. The amount of the alleged contractor’s investment in facilities and equipment.
  4. The permanency of the relationship between the parties.
  5. The extent to which the services rendered are an integral part of the employer’s business.
  6. The expertise and skill of the individual.

What is Next?

The DOL appears to have no current plans to issue a new independent contractor rule. President Biden, however, has indicated that he supports a so called “ABC” test which essentially requires that three of the following factors be satisfied for a worker to be properly classified as an independent contractor.

  • The worker performs tasks that are outside the usual course of the organization’s business.
  • The worker is free from the control and direction of the hiring entity in connection with the performance of the work.
  • The worker is customarily engaged in an independently established business occupation, or trade of the same nature as the work performed for the hiring entity.

Takeaways

Notwithstanding the DOL’s withdrawal of the January Rule, it remains critically important that employers (i) regularly review job positions to determine whether an individual has been properly characterized as an employee or an independent contractor; (ii) consider the entirety of the economic realities of that relationship; (iii) properly memorialize proper independent contractor relationships in agreements; (iv) determine whether the individual would be considered an independent contractor for one purpose, but not for another purpose; (v) work with experienced counsel if adjustments need to be made to the characterization of a worker; and (vi) determine whether insurance exists for mischaracterizations.

To the extent that employers may have harbored any doubts, the DOL’s withdrawal of the January Rule should serve as a powerful reminder that the Biden Administration is and will remain vigilant in protecting the rights of employees.

Marc R. Engel is an employment attorney experienced in providing successful strategies for managing employees and preventing employment claims. For more information, contact Marc at 301-657-0184 or mrengel@lerchearly.com.

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This content is for your information only and is not intended to constitute legal advice. Please consult your attorney before acting on any information contained here.

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