DOL Withdraws Independent-Contractor Rule

By Lisa Nagele-Piazza, J.D., SHRM-SCP, May 5, 2021

The U.S. Department of Labor (DOL) is officially withdrawing the prior administration’s independent-contractor rule, which would have made it easier for businesses to classify workers as independent contractors rather than employees.

The department believes that the rule is inconsistent with the [Fair Labor Standards Act’s] FLSA’s text and purpose and would have a confusing and disruptive effect on workers and businesses alike due to its departure from longstanding judicial precedent,” according to the DOL’s announcement on May 5.

Under the FLSA, employees are entitled to minimum wage, overtime pay and other benefits. Independent contractors are not entitled to such benefits, but they generally have more flexibility to set their own schedules and work for multiple companies.

For Now: No New Rule. Employers shouldn’t expect a new independent-contractor rule any time soon. “We are going back to the decades-old analysis and we really feel that this is the space where we can best protect workers,” said Jessica Looman, principal deputy administrator for the DOL Wage and Hour Division, on a call with reporters. “When it comes to digital workers … we want to make sure that we continue to look at their needs, how they are interacting with their individual employers and whether or not they have the protections of the Fair Labor Standards Act.”

Economic-Realty Test. The DOL has traditionally analyzed a number of factors to consider whether a worker is an independent contractor or employee and looked at “the totality of the circumstances.” The withdrawn rule would have applied a more-limited economic-reality test to determine whether workers are independent contractors or employees and would have primarily considered the following factors:

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

Three other factors would have served as guideposts in determining employment status:

  • 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 (or the individual works under circumstances analogous to a production line).

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,” according to the DOL’s announcement withdrawing the rule.

The ‘ABC’ Test. Although the DOL doesn’t plan to issue a new rule any time soon, President Joe Biden has said he supports an “ABC” test similar to California’s independent-contractor rule. With some exceptions, California requires all three of the following factors to be met for a worker to be properly classified as an independent contractor:

  • The worker is free from the control and direction of the hiring entity in connection with the performance of the work.
  • The worker performs tasks that are outside the usual course of the hiring entity’s business.
  • The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

Other states, such as Illinois, Massachusetts and New Jersey, apply a similarly stringent independent-contractor test.

Labor Secretary Discusses Gig Workers. Secretary of Labor Marty Walsh recently said many gig workers should be classified as employees. Walsh said the DOL would have conversations with companies that employ gig workers to make sure their workers have access to consistent wages, sick time, health care and “all of the things that an average employee in America can access.” He added that gig-worker companies “are making profits and revenue, and I’m not [going to] begrudge anyone for that because that’s what we’re about in America … but we also want to make sure that success trickles down to the worker.”

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