Update: DOL Withdraws Trump Administration’s Independent Contractor Rule
In a not-so-shocking turn of events, the Department of Labor (DOL) announced that, effective May 6, 2021, it would rescind the employer-friendly Independent Contractor Final Rule issued right before President Trump left office. Two articles discussing the Trump Administration’s rule in more detail may be found here and here.
The Fair Labor Standards Act (FLSA) requires that employers pay their employees at least the federal minimum wage as well as overtime pay, whereas independent contractors do not receive the same FLSA-mandated protection. But the tricky part comes from determining when a worker can or cannot be properly classified as an independent contractor. The DOL cited several reasons for its withdrawal of the January 2021 rule, which attempted to clarify independent contractor classification issues.
First, the DOL noted that the rule’s standard has never been used by any court or by the Wage and Hour Division (WHD) and opined that that the standard is not supported by the FLSA’s text or purpose. For years, courts and the WHD have applied a multifactor balancing test to assess whether the worker, as a matter of economic reality, is economically dependent on the employer or is in business for him or herself. Courts apply this “economic reality” analysis and consider and balance several factors. However, the Trump rule focused primarily on two “core factors”—control and opportunity for profit or loss—and determined that they have greater probative value in the analysis.
The DOL indicated that the rule’s prioritization of these 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.
Furthermore, by emphasizing these two factors to overshadow the remaining factors, the DOL indicated that, as a policy matter, this would result in more workers being classified as independent contractors not entitled to the FLSA’s protections—contrary to the FLSA’s purpose of broadly covering workers as employees.
Finally, the DOL noted that withdrawal of the rule would not be disruptive because it had not yet taken effect.
Despite confirmation that the employer-friendly rule is officially withdrawn, the same fact-intensive analysis to classify workers as either independent contractors or employees is still required. Employers should always be mindful when classifying individuals as independent contractors because there are expensive ramifications from misclassifying workers.