DOL Withdraws Independent Contractor Rule

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On May 5, 2021, the Department of Labor (DOL) announced a final rule to withdraw a Trump-era independent contractor rule for determining how to classify workers under the Fair Labor Standards Act (FLSA). The DOL stated that the withdrawal will be effective on May 6, 2021.

The now-withdrawn independent contractor rule was announced on January 6, 2021, a mere two weeks before the end of former President Trump’s term. The rule was originally intended to go into effect on March 8, 2021, but the DOL under the Biden administration delayed the effective date. If it had taken effect, the rule would have modified the “economic realities test” to focus on two “core factors” to determine whether a worker is an independent contractor: (1) the nature and degree of control over the work; and (2) the worker’s opportunity for profit or loss based on initiative and/or investment. The rule also identified three lesser factors considered in the analysis: the skill required for the work, the permanence of the working relationship, and whether the work is part of an integrated unit of production.  The DOL specified that under this rule “the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.”

The DOL identified several reasons for its withdrawal of the rule. It observed that the rule was not in accordance with the text or purpose of the FLSA or current judicial precedent and took issue with the rule’s prioritization of two factors over the longstanding balancing approach involving a review of the totality of the circumstances related to the employment relationship. Further, the DOL stated that the rule impermissibly narrows the application of the economic realities test by disregarding several factors that the courts and the Wage and Hour Division have previously considered in the analysis, such as the employer’s investments, the centrality of the worker’s work to the employer’s business, and the employer’s right or authority to control the worker. Additionally, the DOL expressed policy concerns that the rule’s analysis “would result in more workers being classified as independent contractors not entitled to the FLSA’s protections, contrary to the Act’s purpose of broadly covering workers as employees.”  Overall, the DOL’s withdrawal of the rule and reasoning behind it signals that independent contractor status will continue to be a focus of the DOL and employers may expect to see more changes in the future.

For now, the withdrawal of the rule does not have any effect on the operations of employers. The rule never went into effect before it was withdrawn and the DOL has not proposed a new independent contractor rule to take its place. Thus, the withdrawal does not require any immediate action on the part of employers. However, employers should continue to monitor developments on worker classification in order to be prepared for any impending changes.

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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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