On May 5, just months after the US Department of Labor issued its final rule to clarify the classification of independent contractors under the Fair Labor Standards Act (FLSA) – the DOL issued a statement to withdraw the rule. The withdrawal will take effect on May 6. The action follows DOL’s hint of its disfavour of the new rule in January 2021 when the DOL withdrew two opinion letters containing the analysis of the new rule and the application of the factors to specific scenarios.
As discussed in the e-alert released Jan. 8, the proposed rule provided a set of standards for determining when an individual would be classified as an independent contractor. The test was intended to provide additional structure and clarity on independent contractor status under the FLSA. The test consisted of the following two main factors: (1) the nature and degree to which the worker exercises control over the work, and (2) the possibility of the worker making a profit or a loss. The Final Rule also proposed three other factors to be considered in the event that these two essential factors did not lead to a clear determination.
Now that the rule has been withdrawn, employers must use the seven-factor economic realities test that was used previously. These factors are described in the Wages and Hours Division document Fact Sheet # 13 as of July 2008, and are as follows:
- 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 alleged contractor’s investment in plant and equipment.
- The nature and degree of control exercised by the principal.
- 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 self-employed entrepreneur claimed.
- The degree of independent organization and operation of the enterprise.
Unlike the test explained in the January rule, the economic realities test does not weigh more than any other factor or pair of factors. Moreover, this list is not exhaustive, providing only a list of factors that the United States Supreme Court has found important for the analysis and thus leaving the courts and employers to consider other facts specific to the scenario for determining independent contractor status versus employee status. As such, there is some uncertainty in the economic realities test, so employers will need to tread carefully as they continue to examine individuals through the prism of the economic realities test.
The DOL declares in a Press release that its purpose in removing the rule is to preserve employee protections under the FLSA, including those relating to overtime and minimum wage. Since the final rule had not yet entered into force when it was withdrawn, this might not be a drastic change for most employers.