Employment Law

DOL Withdraws Independent Contractor Test featured image

DOL Withdraws Independent Contractor Test

In early January 2021, just weeks before leaving office, the Trump administration rolled out a simplified independent contractor test that many perceived as more beneficial to employers. It was set to take effect on March 8. On February 5, the U.S. Department of Labor (DOL) issued a proposal to delay the order to May 7; that delay was made official on March 4.

Now, two months later and as expected on May 5, 2021, the DOL withdrew the Trump-era rule, which never took effect.

What the Withdrawn Rule Stipulated

The withdrawn rule was intended to simplify the economic realities test that determines if a worker should be categorized as an independent contractor or an employee. The simplified test would have focused on two main factors, with three other factors to be considered. The two main factors were:

  • the nature of the work and the degree of control the worker has over the work
  • the opportunity the worker has for profit or loss based on his or her initiative and/or investment

The three additional factors were:

  • the amount of skill the worker requires for the work
  • how permanent the working relationship is between the worker and the employer
  • whether the work is part of an “integrated unit of production”

Current Employee v. Independent Contractor Standards

Since the simplified test has been withdrawn, the DOL’s current guidance for the employee relationship, as delineated in the Fair Labor Standards Act (FLSA), remains in place. It was last updated in July 2008. Per the fact sheet associated with this guidance, “An employment relationship under the FLSA must be distinguished from a strictly contractual one. Such a relationship must exist for any provision of the FLSA to apply to any person engaged in work which may otherwise be subject to the Act. In the application of the FLSA, an employee, as distinguished from a person who is engaged in a business of his or her own, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves. The employer-employee relationship under the FLSA is tested by ‘economic reality’ rather than ‘technical concepts.’ ”

What This Means for Employers

During his campaign and since his inauguration, President Biden has indicated that worker-friendly policies are a priority for his administration. He supports using an “ABC Test,” similar to California’s restrictive standard, to determine independent contractor status. In addition, DOL Secretary Marty Walsh heavily favors the categorization of workers as employees instead of independent contractors.

“By withdrawing the Independent Contractor Rule, we will help preserve essential worker rights and stop the erosion of worker protections that would have occurred had the rule gone into effect,” Secretary Walsh stated. “Legitimate business owners play an important role in our economy but, too often, workers lose important wage and related protections when employers misclassify them as independent contractors. We remain committed to ensuring that employees are recognized clearly and correctly when they are, in fact, employees so that they receive the protections the Fair Labor Standards Act provides.”

As you undoubtedly are aware, according to FLSA provisions, employers must pay employees at least the federal minimum wage for hours worked, as well as 1.5 times their regular compensation for work exceeding 40 hours a week. Most employees also qualify for benefits, including health insurance and retirement plans.

If your company uses independent contractors, review the current criteria and ensure that these workers are classified accurately. This issue will likely continue to come under scrutiny during the Biden presidency.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.