The US Department of Labor (DOL) has officially withdrawn a Trump-era rule that was announced to clarify independent contractor status under the Fair Labor Standards Act (FLSA). The repeal took effect on May 6, 2021. The ruling indicates that the current DOL will examine the relationships of independent contractors with a view to characterizing more workers as employees.
Independent contractor final rule
The FLSA minimum wage and overtime pay requirements apply only to employees, not independent contractors. In the absence of a clear legal definition of “employee,” however, federal courts across the country had been left to develop various definitions and tests to differentiate the two. This led to a patchwork of different tests which were sometimes applied inconsistently.
On January 7, 2021, the DOL issued a final rule that distinguished between employees and independent contractors under the FLSA. The final rule adopted the “economic reality” test, which sought to answer the fundamental question of whether “the individual is, from the point of view of economic reality, in business for himself”. As articulated by the DOL, the economic reality test assesses five factors:
- The nature and degree of control of the worker over the work
- The possibility for the worker to make a profit or a loss
- The skill level required
- The exclusivity and duration of the relationship between the worker and the alleged employer
- The extent to which the services rendered are an integral part of the business
The first two factors – the control of the worker over the work and the possibility of making a profit or a loss – were regarded as main factors and received greater importance. The other three factors served as an additional guide to assess a worker’s status if the first two factors were inconclusive.
In its announcement to withdraw from the independent contractor rule, the DOL said, “[u]After further review and review of the rule and considering public comments, the ministry does not believe that the independent contractor rule is fully aligned with the text or purpose of the FLSA, or with decades of jurisprudence describing and applying the multifactorial economic realities test. “
To the extent that the DOL intended to suggest that there was no case law supporting the final rule, this would be incorrect. Certainly, some cases among circuit and district courts have supported each part of the final rule. In the vacuum resulting from the withdrawal of the rule, case law relating to the status of independent entrepreneur will once again become legally decisive. Thus, employers should continue to operate according to the standards that have been developed in the case law of their particular jurisdictions, but with particular caution when those standards align with the final rule now withdrawn.