Worker Classification Whiplash: The DOL Officially Withdraws the Independent Contractor Rule

May 12, 2021

Businesses are probably reaching for their seatbelts as they continue to adjust to the whiplash associated with a new Presidential administration.  These changes to the law have become more common given that increasingly legal guidance is driven by executive action rather than legislation.  Most recently, we have seen the whiplash arise in the context of worker classifications.

On May 6, 2021, the United States Department of Labor (“DOL”) officially withdrew the Trump-era independent contractor rule.  That rule established the Fair Labor Standard Act (“FLSA”) standard for determining when a worker is an employee or an independent contractor.  This distinction is critical for businesses to determine their obligations to pay their individual workers.  In essence, a worker who qualifies as an employee has to be paid in accordance with the minimum and overtime wage requirements of the FLSA.  These FLSA wage rules do NOT apply to independent contractors.  This means that employees have to be paid at least federal minimum wage for every hour they work, and they have to be paid compensated for overtime, at a rate at least 1.5 times the regular rate, for every hour worked over 40, while independent contractors do not.

The now-defunct independent contractor rule, which was finalized in January 2021, was hailed by the previous administration as clarifying when an individual is an independent contractor.  Briefly, the rule provided that the “economic reality test” (i.e., is the worker actually economically independent from the employer) determines when an individual is an independent contractor or an employee.  It identified the “core” factors relevant to the test as:  1) the nature and degree of control over the individual’s work; 2) the worker’s opportunity for profit or loss and other guiding factors;  3) the amount of skill required for the work; 4) the duration/degree of permanence of the working relationship between employer and worker; and 5) whether the work is part of an integrated unit of production.  The rule also offered practical examples to help employers understand how the test would have been applied.

But the current administration’s DOL disagreed with this approach.  According to the DOL news release, the withdrawal of the 2021 rule was appropriate because 1) it conflicted with the text and purpose of the FLSA and related common law, and 2) it narrowed too greatly the facts and considerations for assessing whether a worker is an employee or an independent contractor to the detriment of workers.  And since it was the rule of an executive agency, not a law passed by Congress, it was easily withdrawn.

So where does the law stand now?  The DOL did not propose a new rule to replace the one withdrawn.  There is also no indication that the DOL will be finalizing a new rule any time soon.  This means that prior precedent and DOL materials will guide worker classification issues until new rules are developed.

Unfortunately, these earlier materials contain no single rule or test for determining when a worker is an independent contractor or an employee.  According to prior decisions by Federal courts and guidance from the DOL, the totality of the circumstances must be assessed to determine whether there existed an employee/employer relationship.  A 2008 DOL Fact Sheet regarding the employment relationship provides that among the factors significant in that assessment are:

  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.

By contrast, factors like the place where work is performed, the absence of a formal employment agreement, whether an alleged independent contractor is licensed by State/local government, or the time or mode of pay are not considered relevant to determinations as to whether there is an employment relationship.

With all that said, businesses who misclassify workers as independent contractors face the possibility of significant and costly litigation.  So it is important to comply with the law.  Businesses who may have re-characterized workers as independent contractors based on the now withdrawn 2021 rule should re-assess whether their classifications still hold up.  Businesses who did not re-classify workers when the 2021 rule became final should nonetheless familiarize themselves with and follow prior DOL and court guidance.  And as always, stay tuned.  Let’s face it, nothing is certain in life except death, taxes, and change.