Labor Department withdraws employee/independent contractor classification rule

The United States Department of Labor (the Department) has announced a final rule withdrawing the “Independent Contractor Status Under the Fair Labor Standards Act” rule (Independent Contractor Rule). The Independent Contractor Rule was enacted by the Department under the Trump Administration and would have generally found “gig economy” and certain other workers as independent contractors for purposes of federal labor law.

Background—Independent Contractor Rule

On January 6, 2021, the Department, as part of the Trump Administration, announced a final rule regarding the standard for employee versus independent contractor under the Fair Labor Standards Act (FLSA). The effective date of the final rule was March 8, 2021.

In the final rule, the Department said it:

• Reaffirmed an “economic reality” test to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).
• Identified and explained two “core factors” that it said are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself:
  • The nature and degree of control over the work.
  • The worker’s opportunity for profit or loss based on initiative and/or investment.
• Identified three other factors that may serve as additional guideposts in the analysis, particularly when the two core factors do not point to the same classification. The factors were:
  • 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.
• Said that the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
• Provided six fact-specific examples applying the factors.

Background—proposed withdrawal

On March 12, 2021, the Department, as part of the Biden Administration, issued a notice of proposed rulemaking (NPRM) proposing to withdraw the Independent Contractor Rule.

The Department finalizes the withdrawal

The Department has announced that it has decided to finalize the withdrawal of the Independent Contractor Rule for several reasons, including:

• 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.

Observation

The rule would have generally found “gig economy” and certain other workers to be independent contractors for purposes of federal labor law. Could the proposed withdrawal of the rule signify an intent to classify workers of Uber, Lyft, DoorDash, etc. as employees?  If so, the withholding, payroll tax and benefit implications could be massive for these gig economy businesses.