The DOL Has Withdrawn the Independent Contractor Rule

The U.S. Department of Labor (DOL) announced that it has withdrawn the "independent contractor rule" to maintain workers' rights to the minimum wage and overtime compensation protections under the Fair Labor Standards Act (FLSA). The rule was enacted by the department under the Trump administration and would have generally considered "gig economy" and certain other workers as independent contractors for purposes of federal labor law.

History of the Rule

In September 2020, the DOL issued proposed regulations that would have provided an "economic reality" test to determine a worker's status as an FLSA employee or an independent contractor. The test would have identified two "core factors" (the nature and degree of the worker's control over the work, and the worker's opportunity for profit or loss based on initiative and/or investment) and three other factors for guidance in making a worker classification determination.

The DOL received nearly 1,800 comments on the proposed rule before the comment period closed. Some organizations applauded the proposed rule for its flexibility in work arrangements. Others voiced opposition, citing concerns that the rule would misclassify workers as independent contractors who are not protected under the FLSA.

The DOL posted the final "independent contractor rule" in early-January 2021 when President Trump was still in office. It was similar to the proposed rule and used an "economic reality" test for guidance in classifying workers. The rule was scheduled to take effect on March 8, 2021.

However, in February 2021 after the Biden administration took over, the DOL proposed that the independent contractor rule effective date would be delayed until May 7, 2021. Then, in early-March 2021, the DOL announced a final rule that delayed the effective date of this rule until May 7, 2021. The DOL noted that the proposed delay received 1,512 comments in support of the delay.

On March 26, 2021, a complaint was filed by the Coalition for Workforce Innovation, Associated Builders and Contractors of Southeast Texas, and Associated Builders and Contractors Inc. It argued that the effective date delay was "arbitrary, capricious, and contrary to procedures required by law." The plaintiffs allege that the DOL failed to provide a meaningful comment period before finalizing the delay and did not offer "substantive justification" for the delay.

Rule Withdrawn

Finally, on May 5, 2021, the DOL announced it was withdrawing the independent contractor rule on May 6, 2021, one day before the delayed effective date was to take place. The agency listed the following reasons for the withdrawal:

• It would have been "in tension" with the FLSA's text and purpose, as well as relevant judicial precedent.
• Its 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.
  
• 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.

The DOL added that the rule's withdrawal will also avoid a reduction in workers' access to employer-provided fringe benefits such as health insurance and retirement plans. In addition, the DOL believes the withdrawal will avoid a reduction in other benefits such as unemployment insurance and workers compensation coverage.

Worker Classification

If you need assistance in classifying workers to stay in compliance with various laws, including tax laws, consult with your tax and human resource advisors.