The U.S. Department of Labor (DOL) officially withdrew a Trump-era rule that had been announced to clarify independent contractor status under the Fair Labor Standards Act (FLSA). The repeal took effect on May 6, 2021. The move signals that the current DOL will be scrutinizing independent contractor relationships with an eye toward characterizing more workers as employees.
Independent Contractor Final Rule
The FLSA's minimum wage and overtime pay requirements apply only to employees and not independent contractors. With no clear statutory definition of "employee," however, federal courts across the country had been left to fashion various definitions and tests to differentiate the two. This led to a patchwork of different tests that were sometimes inconsistently applied.
On Jan. 7, 2021, the DOL published a final rule that distinguished between employees and independent contractors under the FLSA. The final rule adopted the "economic reality" test, which sought to answer the fundamental question of whether "the individual is, as a matter of economic reality, in business for him or herself." As articulated by the DOL, the economic reality test evaluates five factors:
- The nature and degree of the worker's control over the work
- The worker's opportunity for profit or loss
- The amount of skill required
- The exclusivity and length of the relationship between the worker and the alleged employer
- The extent to which services rendered are an integral part of the business
The first two factors – the worker's control over the work and opportunity for profit or loss – were considered primary factors and given greater weight. The other three factors served as additional guidance for evaluating a worker's status if the first two factors were inconclusive.
In its announcement withdrawing the independent contractor rule, the DOL stated that, "[u]pon further review and consideration of the rule and having considered the public comments, the department does not believe that the independent contractor rule is fully aligned with the FLSA's text or purpose, or with decades of case law describing and applying the multifactor economic realities test."
To the extent the DOL intended to suggest that none of the case law supported the final rule, that would be inaccurate. Certainly, some cases among the circuit and district courts supported each part of the final rule. In the vacuum following the rule's withdrawal, the case law regarding independent contractor status will again become legally determinative. Thus, employers should continue operating under the standards that have been developed in the case law in their particular jurisdictions, but with extra care where those standards aligned with the now-withdrawn final rule.