Two weeks before former President Trump left office, the U.S. Department of Labor (DOL) published a final rule establishing an independent contractor status test under the Fair Labor Standards Act (FLSA). The Trump-era rule was scheduled to take effect on March 8, 2021; however, under President Biden, the DOL delayed the rule’s effective date for approximately two months, before officially withdrawing the rule effective May 6, 2021.
Had the Trump-era rule taken effect, employers could have more easily classified workers as independent contractors under the FLSA. This was attractive to employers as independent contractors are not subject to the FLSA’s minimum wage and overtime requirements.
In its final rule, the Trump DOL reaffirmed an “economic reality” test, comprised of five factors, to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee). Of the five factors, the DOL identified two “core factors” to be “most probative” to the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself:
- The nature and degree of control over the work; and
- The worker’s opportunity for profit or loss based on initiative and/or investment.
The three other factors would have served as “additional guideposts” in the analysis, particularly when the two “core factors” did not point to the same classification:
- The amount of skill required for the work;
- The degree of permanence of the working relationship between the worker and the potential employer; and
- Whether the work is part of an integrated unit of production.
In withdrawing the rule, the Biden DOL explained that the final rule conflicted with the “FLSA’s text and purpose, as well as relevant judicial precedent.” In addition, prioritizing the two “core factors” 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.” Lastly, 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 protections.”
U.S. Secretary of Labor Marty Walsh provided further insight for the withdrawal of the rule:
“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. Legitimate business owners play an important role in our economy but, 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.”
As a result of the withdrawal, employers must continue to rely upon traditional “economic realities” tests, which vary from circuit to circuit, to determine whether workers are independent contractors. Employers are encouraged to seek legal counsel to assist them with navigating the different factors courts rely upon in their jurisdictions.