On May 5, 2021, the U.S. Department of Labor (DOL) removed an end-of-term rule from the Trump administration to determine whether workers should be classified as independent contractors or employees under the Fair Labor Standards Act. The old administration rolled out the rule on January 7, 2021, and although it went through the entire rulemaking process, it never went into effect.
Rule withdrawn and economic realities test revised
The withdrawn rule would have simplified the “economic realities test” to determine whether a worker is properly classified as an independent contractor. The simplified economic realities test would have focused on two essential factors, while taking into account three other factors to guide the investigation of a worker’s status as an employee or independent contractor. The two main factors would have been:
- the nature and degree of control over the work; and
- the possibility for the worker to make profits or losses.
The three additional guiding factors would have been:
- the skill level required for the job;
- the degree of permanence of the employment relationship between the worker and the employer; and
- whether the work is part of an integrated unit of production.
These additional factors were intended only to guide the investigation, and not to constitute an exhaustive list of the factors taken into account.
Testing current economic realities
As it stands, the DOL current orientation on the factors taken into account in the economic realities test, last updated in July 2008, remains in place. These factors include:
- the extent to which the services rendered are an integral part of the principal’s business;
- the permanence of the relationship;
- the amount of the contractor’s alleged investment in plant and equipment;
- the nature and degree of control exercised by the principal;
- the opportunities for profit and loss of the alleged entrepreneur;
- the degree of initiative, judgment or forethought in free market competition with others required for the success of the claimed independent entrepreneur; and
- the degree of independence of the organization and operation of the company.
Withdrawal and litigation
The withdrawal of this rule by the DOL is not unexpected. On February 5, 2021, DOL published a proposal to extend the effective date of the Trump administration rule to May 7, 2021, 60 days after the initial effective date of March 8, 2021. March 4, 2021, after reviewing the approximately 1,500 Comments received in response to this proposal, the DOL issued a final rule delaying the date of entry into force of the rule as proposed. The DOL explained that the delay was in accordance with a memorandum of January 20, 2021 from the assistant to the president and chief of staff of the United States, entitled “Regulatory Freeze Pending Review”.
On March 12, 2021, DOL proposed to withdraw the rule before it went into effect, an action that met opposition from business groups. On March 26, 2021, business groups challenged the proposed withdrawal in court, arguing that the DOL failed to provide a meaningful notice and comment period in violation of the Administrative Procedure Act. However, this case is still in its early stages.
Possible alternatives and consequences for employers
Since his inauguration and during his campaign, President Biden has indicated that he intends to make pro-worker policies a priority in his administration. Biden said he supported an “ABC test” for independent contractors, similar to the one California passed in 2018, imposing a standard restrictive enough for a person to qualify as an independent contractor.
Whichever test is used, the Biden-era DOL, under the leadership of Secretary Marty Walsh, will likely favor the classification of workers as employees rather than independent contractors. For example, no later than April 30, 2021, Walsh stated that in many cases, concert workers should be classified as employees. Businesses that use independent contractors should consider assessing whether these individuals are properly classified, recognizing this is a point of interest for Biden-era DOL.