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Department of Labor Withdraws Independent Contractor vs. Employee Rule

Department of Labor Withdraws Independent Contractor vs. Employee Rule

During the final days of the Trump administration, the Department of Labor (DOL) issued a ruling that was designed to implement an “economic reality” test to determine the independent contractor status of a worker. However, after a change in presidential administrations in January 2021, the clarification has been withdrawn. Here's what you need to know.


UPDATED: DOL Withdraws New Independent Contractor Rule

After taking office on Jan. 20, 2021, the Biden administration released a regulatory freeze pending review memorandum, which postpones for 60 days any rulings that have been issued but not yet taken effect. This includes the DOL's clarification on independent contractors vs. employee standards. The new rule was originally designed to take effect March 8, 2021,

The DOL announced in May 2021 that the rule has been permanently withdrawn, citing a conflict with the Fair Labor Standards Act (FLSA). More specifically, the DOL explained the decision by providing the following reasons: 

  • 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 of whether a worker is an employee or an independent contractor, resulting in workers losing FLSA protections.

The DOL also argued that the withdrawal of the rule will "avoid a reduction in workers' access to employer-provided fringe benefits such as health insurance and retirement plans" as well as other benefits like unemployment insurance and workers' compensation. Writing in JD Supra, law firm Hinshaw & Culbertson points out that the DOL hasn't "indicated whether it will offer a new rule on the topic."


Refresher: What is an Independent Contractor?

An independent contractor is a self-employed individual, business, or corporation that provides services to another individual or business under the terms laid out in a contract. They are not considered employees, as they work only when required.

Under the FLSA, the differences between an independent contractor and an employee are varied but vital, particularly legally. According to the IRS, “you are not an independent contractor if you perform services that can be controlled by an employer.”


New Rule Was Designed to Clarify Standards for Defining Independent Contractors

The rule included four main changes to the process of determining if a worker is an independent contractor. Before the regulatory freeze, the new standard for employee versus independent contractor status under the FLSA was supposed to include: 

  1. “Economic Reality” Test: The new test determines if a worker is in business for themself (independent contractor) or economically dependent on an employer for work (employee). 
  2. “Core Factors”: Two core factors help determine whether or not a worker is economically dependent on an employer. They include the nature and degree of the worker’s control over their work and the worker’s opportunity for profit or loss based on initiative and/or investment. 
  3. Three Additional Factors: If unable to determine a worker’s status, three additional factors can be used to help determine classification. They include the amount of skill required for the work, the degree of permanence in the relationship between the worker and the employer, and if the work is part of an integrated unit of production. 
  4. Actual Practice Relevance: When determining a worker’s independent contractor status, actual practice is more relevant than what’s contractually or theoretically possible.

Proposed Sept. 22, 2020, and finalized on Jan. 6, 2021, the final rule was scheduled to take effect March 8, 2021, before being subjected to the regulatory freeze on Jan. 20, 2021, and withdrawal in May 2021.


What Should Employers Expect From the Biden Administration Regarding Labor?

The Biden administration has promised to strengthen the power of labor moving forward. According to the president's campaign website, Biden committed to fighting against employers violating labor laws, including misclassifying employees as independent contractors. 

The president has also promised to encourage and incentivize unionization and collective bargaining, as well as fair pay and workplace protections. One relatively recent development includes an executive order that issued worker guidelines to protect against COVID-19

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