United States Department of Labor Withdraws Independent Contractor Rule Under the Fair Labor Standards Act

Clark Hill PLC

On May 5,  ­­just a few short months after the U.S. Department of Labor issued its final rule to clarify the independent contractor classification under the Fair Labor Standards Act (FLSA) – the DOL  issued a statement of the rule’s withdrawal. The withdrawal will be effective May 6. The action follows the DOL’s hint at its disfavor of the new rule in Jan. 2021 when the DOL withdrew two opinion letters containing the new rule’s analysis and application of the factors to specific scenarios.

As discussed in the e-alert issued on Jan. 8, the proposed rule provided a set of standards for determining when an individual would be classified as an independent contractor. The test purported to provide further structure and clarity on independent contractor status under the FLSA. The test consisted of the following two core factors: (1) the nature and degree to which the worker exercises control over the work, and (2) the worker’s opportunity for profit or loss. The final rule also proposed three other factors to be considered in the event these two core factors did not yield a clear determination.

Now that the rule has been withdrawn, employers must utilize the seven-factor economic realities test that was used previously. These factors are outlined in the Wage and Hour Division’s Fact Sheet #13 from July 2008, and are as follows:

  1. The extent to which the services rendered are an integral part of the principal’s business.
  2. The permanency of the relationship.
  3. The amount of the alleged contractor’s investment in facilities and equipment.
  4. The nature and degree of control by the principal.
  5. The alleged contractor’s opportunities for profit and loss.
  6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
  7. The degree of independent business organization and operation.

Unlike the test explained in the January rule, the economic realities test does not weigh any single factor or pair of factors more heavily than another. Additionally, this list is non-exhaustive, providing only a list of factors the U.S. Supreme Court has deemed significant to the analysis and thereby leaving courts and employers to consider other scenario-specific facts in determining independent contractor versus employee status. As such, the economic realities test does carry some uncertainty, so employers will have to move forward cautiously as they continue to examine individuals through the lens of the economic realities test.

The DOL states in a News Release that its goal in withdrawing the rule is to preserve employee protections under the FLSA, including those relating to overtime and minimum wage. Because the final rule had not yet taken effect at the time of its withdrawal, this may not be a drastic change for most employers.

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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