Biden’s Department of Labor Eliminates Narrow, Employer-Friendly Trump-Era Independent Contractor Test

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On May 6, 2021, in a much-anticipated move, the Biden Administration announced a final rule withdrawing the employer-friendly independent contractor test published in the last few weeks of Donald Trump’s presidency. The withdrawal is effective immediately. As discussed here, defining workers as employees versus independent contractors under the Fair Labor Standards Act (“FLSA”) can have significant implications on employers. The FLSA requires that employers provide minimum wage and overtime pay to employees, whereas independent contractors enjoy no entitlement to same. Over the last several years, the employee/independent contractor debate has taken center stage in the world of employment litigation. Accordingly, it is vital for employers to stay apprised of current rules and regulations impacting the analysis.

Trump’s Narrowed Independent Contractor Test

On January 6, 2021, Trump’s Department of Labor issued a final rule adopting the longstanding five-factor “economic realities test,” but with a narrowed focus on two “core factors”: (1) the degree of the individual’s control over the work and (2) the worker’s opportunity for profit or loss. The narrowing of the analysis to these core factors made it decidedly easier for workers to be classified as independent contractors. While the final rule was scheduled to take effect March 8, 2021, the Biden administration delayed the effective date of the rule to May 7, 2021. Due to Biden’s withdrawal of the rule, Trump’s independent contractor test never made its debut, reverting back to the longstanding five-factor economic realities test. A thorough analysis of the independent contractor test proffered by the Trump administration can be found in Merrell Renaud’s October 6, 2020 blog post.

Motivation for Withdrawal of Trump’s Narrowed Test

The Wage and Hour Division of the U.S. Department of Labor cites the following reasons as influencing the decision to withdraw the prior independent contractor test adopted by the Trump administration:

  • Friction between the prior independent contractor test and the FLSA’s text and purpose.
  • The prior test’s undermining the time-honored balancing approach of the [five-factor] economic realities test and court decisions utilizing a totality of the circumstances review.
  • The prior test’s narrowed analysis resulting in workers losing FLSA protections.

The Department stated it anticipates the withdrawal will result in more workers gaining access to employer-provided benefits such as health insurance, retirement plans, unemployment insurance, and workers’ compensation coverage.

Biden’s Employee-Friendly Position on Classification of Workers and Implications on Employers

The Department of Labor’s May 6 announcement was not accompanied by a new test for classification of workers as employees versus independent contractors. Rather, the five-factor economic realities test will continue to govern classification under the FLSA until the Department of Labor adopts a different test. Given the Biden administration’s progressive agenda and stated intention to implement a stronger federal standard modeled on the three-pronged “ABC test,” which is currently used in California, employers should prepare for a stricter, more employee-friendly test down the pipeline. Lindsay Sfekas’s August 25, 2020 blog post discusses the ABC test and offers a demonstrative example of how the employee/independent contractor analysis can have sweeping impacts across industries.

As misclassification of workers as independent contractors as employees can have significant consequences, and enforcement against misclassification is likely to increase dramatically under the Biden administration, employers are wise to seek legal counsel to aid in conducting a thorough classification analysis before classifying workers as independent contractors.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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