Classifying Workers? DOL Withdraws Independent Contractor Rule

Posted by Kenneth N. Winkler on

There are a number of factors to determine if a company is properly classifying workers as contractors.  Effective May 6, 2021, the U.S. Department of Labor withdrew the “Independent Contractor Rule.”

In a press release, the Department withdrew the rule for several reasons, including:

  • The independent contractor rule was in tension with the FLSA’s text and purpose, as well as relevant judicial precedent.
  • The rule’s prioritization of two “core factors” for determining employee status under the FLSA 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.
  • The rule would have narrowed the facts and considerations comprising the analysis whether a worker is an employee or an independent contractor, resulting in workers losing FLSA protections.

Classifying Workers: Background and Political Debate
The rule was adopted under the Trump administration and was to be operative March 8th. However, the DOL, under President Biden, delayed implementation and then proposed withdrawing the rule entirely.

Like many other employment law issues, the use of independent contractors evoked political debate. Proponents of the Trump rule contend that the rule expanded opportunities to earn a livelihood through modern work structures – such as emerging gig economies. Those opposed to the Trump rule contend that the rule undermined minimum wage and overtime protections and hurt American workers.

Worker classification, or more specifically, whether a worker can be classified as an independent contractor has significant financial consequences to both workers and companies.

The FLSA requires covered non-exempt employers to pay non-exempt employees at least the federal minimum wage for every hour they work and overtime compensation at not less than one-and-one-half times their regular rate of pay for every hour over 40 hours in a workweek.

FLSA protections do not apply to independent contractors.  Although independent contractors are not entitled to such benefits, they generally have flexibility to set their own schedules, accept or reject assignments and work for multiple companies.

What’s Next?
The DOL will now fall back to a more vague test that considers a number of factors to decide employee classification, or whether a company is properly classifying workers as contractors.  

It is uncertain when a new independent rule will be proposed. President Biden has publicly supported an “ABC” test similar to California’s independent-contractor rule. The ABC test requires all three of the following factors to be met for a worker to be properly classified as an independent contractor:

  • The worker is free from the control and direction of the hiring entity in connection with the performance of the work;
  • The worker performs tasks that are outside the usual course of the hiring entity’s business; and
  • The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

The ABC test is a more stringent test than the Trump-era economic-reality test that would have primarily considered the following two factors:

  • The nature and degree of control over the work.
  • The worker’s opportunity for profit or loss based on initiative and investment.

Simply stated, it would have been easier to classify workers as independent contractors under the withdrawn rule. 

Employer Takeaway
Given the withdrawal of the Trump-era political climate, employers should carefully consider the factors required to properly classify workers as independent contractors and the associated risks.

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