On May 5th, the U.S. Department of Labor (DOL) announced the withdrawal of the “Independent Contractor Rule” which had been adopted by the Trump administration. The rule was expected to be effective on March 8, 2021, but a presidential memo, dated January 20, 2021, has postponed it for two weeks and is expected to open another period for public input.
There had been speculation that the Biden administration would seek to rescind this rule – based on comments made during the presidential campaign, which was made more likely by the appointment of a former labor representative as the head of the Department.
The new “final rule” will be published in the Federal Register on May 6th, 2021[1], and per its considerations, will maintain workers’ rights to the minimum wage and overtime compensation protections of the Fair Labor Standards Act (FLSA).
The FLSA is part of a 1930’s era of worker protection legislation, and it specifically establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in Federal, State, and local governments. Unlike employees, independent contractors do not enjoy the benefits of the FLSA.
According to the Trump DOL’s text, the goal of the Department’s rule was to clarify the economic reality test to increase precision and predictability, resulting in benefit to workers and businesses and encourage innovation and flexibility in the economy.
However, the new final rule, which will take effect on May 6, withdrew the previous Trump (aborted) rule) , among other reasons, because it 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.[2]
The Trump (aborted) rule
The rule explained that independent contractors are workers who, as a matter of economic reality, are in business for themselves as opposed to being economically dependent on the potential employer for work. It’s economic reality test focused on two core factors (there are five factors, and the three others are described below):
- The nature and degree of the worker’s control over the work; and
- The worker’s opportunity for profit or loss based on initiative, investment, or both.
The analysis of this two-factor test considers whether a worker is in business for themselves, and therefore is an independent contractor, or is, instead, economically dependent on an employer for work, and, as a result, should be classified as an employee.
While insisting on the importance of these two factors for the determination of the worker’s status, the Trump rule did not override the use of three additional factors employed by most courts and the Department itself, which are:
- The amount of skill required for the work;
- The degree of permanence of the working relationship between the individual and the potential employer; and
- Whether the work is part of an integrated unit of production.
Under that rule, these three factors would have carried less weight in the determination of the economic dependence of the worker and are less probative (of the worker’s dependence on the employer) than the two core factors.
The Trump rule sought to give more probative value to the actual practice than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor. In other words, and as an example, if an agreement says that the worker was an employee but the employer neglected or did not need to have direct control over how the work was done, then the employer could have claimed that there wasn’t really an employment relationship, despite a contract to the contrary.
What changed with Biden’s new final rule?
While the Trump DOL rule did not present a major shift in interpretation, it intended to relax the framework for employers to classify workers as independent contractors under the FLSA. With the new final rule, the determination of the employer-employee relationship prevents a heavier focus on the employer’s “control” over the worker and returns to the evaluation of several, equally important factors, which are generally described above.
Eliminating the Trump DOL rule ensures that employers have less discretion about establishing an independent contractor relationship, ensuring that the employer won’t “contract away” the employee’s rights, since “no individual factor is conclusive and […] the ultimate determination depends upon the circumstances of the whole activity.”[3]
Why is it relevant?
As with many regulatory regimes in the context of employment and labor law, the determination of employment status under the rule affects the extent to which the worker is or is not entitled to certain fringe benefits. Individuals performing services as independent contractors do not benefit from protections under the FLSA, more specifically, they are not entitled to minimum wage and overtime for every hour worked over 40 in a work-week, and employers hiring independent contractors are also not required to keep records of an independent contractor.
An additional perceived benefit is that an employee who would have been misclassified as an independent contractor would be responsible for tax liabilities that are typically of the responsibility of an employer, such as payroll taxes, which includes 6.2% for Social Security tax and 1.45% of Medicare tax.
The rule is a loss for Uber, Lyft, and DoorDash, which have been battling their workers in court for the past few years to determine whether their drivers are freelancers or employees, by making it harder to counter their workers as employees under federal law.
While state laws vary on their treatment of employees and independent contractors, the rule taking effect does not overturn state laws and does not prevent the formation of an independent contractor relationship either. You should always consult an attorney to better understand how changes such as this may impact your business and how to properly classify a worker when the situation is unclear.
[1] https://www.federalregister.gov/public-inspection/2021-09518/independent-contractor-status-under-the-fair-labor-standards-act-withdrawal
[2] https://www.dol.gov/newsroom/releases/whd/whd20210505
[3] See Real v. Driscoll Strawberry Associates, Inc., 603 F.2d 754 (9th Cir. 1979).
