On May 5, 2021, the U.S. Department of Labor’s (DOL) Wage and Hour Division (WHD) announced the withdrawal of the "Independent Contractor Rule," effective as of May 6, 2021. The primary cause of the withdrawal is to retain employees' rights to the minimum wage and overtime compensation protections of the Fair Labor Standards Act (FLSA).

Before we get into the specifics of the withdrawal, you may be interested in the rule as it currently stands. An overview of the current standing rule is summarized below.

What is the rule that currently stands?

The FLSA requires employers to pay employees at least the federal minimum wage, and in most cases, offer overtime at time and one-half an employee’s regular rate of pay for all hours worked in excess of 40 per week. Youth employment provisions along with recordkeeping obligations are also included in the Act.

According to the DOL, the FLSA applies “to all employees of certain ‘enterprises.’” This means that if an employer has independent contractors, an employer does not have to adhere to the FLSA’s minimum wage, overtime, and recordkeeping requirements, due to the fact that independent contractors are considered self-employed.

On several occasions, the U.S. Supreme Court has indicated that there is no single rule or test for determining an individual’s work status for purposes of the FLSA. The FLSA places "economic reality" ahead of "technical concepts" in determining the employer-employee relationship.

The Court has considered the following seven significant factors in determining a worker’s status:

  1. “The extent to which the services rendered are an integral part of the principal's business.
  2. The permanency of the relationship.
  3. The amount of the alleged contractor's investment in facilities and equipment.
  4. The nature and degree of control by the principal.
  5. The alleged contractor's opportunities for profit and loss.
  6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
  7. The degree of independent business organization and operation.”

What was the intention of the new rule?

If the new rule had been implemented, the "economic reality test" would have been altered to focus on two "core factors" to assess “whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).”

The “core factors” noted in the withdrawn rule are outlined below:

  • “The nature and degree of control over the work.
  • The worker’s opportunity for profit or loss based on initiative and/or investment.”

Three other factors were also specified in the withdrawn rule, with the intention to have been used as additional guideposts in the analysis:

  • “The amount of skill required for the work.
  • The degree of permanence of the working relationship between the worker and the potential employer.
  • Whether the work is part of an integrated unit of production.”

The DOL also noted that under the withdrawn rule, “the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.”

The DOL released a Notice of Proposed Rulemaking (NPRM) on March 12, 2021, seeking to withdraw the Independent Contractor Rule. The Department decided to complete the withdrawal of the Independent Contractor Rule after analyzing the over 1,000 comments received in response to the NPRM.

What are the reasons for the withdrawal?

Now that we’ve covered some background, let’s review the department's several reasons for withdrawing the Independent Contractor Rule.

The DOL provides three reasons for withdrawing the rule:

  • “The independent contractor rule was in tension with the FLSA’s text and purpose, as well as relevant judicial precedent.
  • The rule’s prioritization of two “core factors” for determining employee status under the FLSA would have undermined the longstanding balancing approach of the economic realities test and court decisions requiring a review of the totality of the circumstances related to the employment relationship.
  • The rule 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.”

The DOL notes that withdrawing the independent contractor rule will aid in the preservation of essential worker rights. The FLSA includes rules requiring covered employers to pay employees at least the federal minimum wage for each hour worked, as well as overtime compensation of at least one-and-one-half times their usual rate of pay for each hour worked above 40 in a workweek. Independent contractors are not covered by the FLSA protections.

How does this affect employers?

Given that the rule never went into effect, there is no anticipation that this will affect employers in any way. However, employers should keep an eye on worker classification advancements in order to be prepared for any future adjustments.

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Disclaimer: Please note that this is not all-inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your own legal advisor regarding the specific application of the information to your own plan.