Trump-era independent contractor rule withdrawn
Effective today, May 6, 2021, the Department of Labor’s (DOL’s) Trump-era independent contractor rule has been officially withdrawn. The Trump-era independent contractor rule, which never went into effect due to the change between presidential administrations, would have made it easier for companies to classify workers as independent contractors.
Trump-era independent contractor rule
The Trump-era independent contractor rule expressly adopted and clarified the “economic realities test” for worker classification, and would have narrowed the focus of the inquiry to five distinct factors: (1) the nature and degree of the individual’s control over the work; (2) the individual’s opportunity for profit or loss; (3) the amount of skill required to perform the work; (4) the degree of permanence in the relationship between the individual and the potential employer; and (5) whether the work performed by the individual is part of an integrated unit of production. The independent contractor rule veered away from the classic application of the economic realities test applied by the courts by providing that the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss were “core factors” that were to be given greater weight than the other factors. If both of those two “core factors” supported the same classification, there would have been a “substantial likelihood” that the classification is appropriate. Many viewed this as a substantial departure from the prior multi-factor “totality of the circumstances tests,” because if the “core factors” both pointed towards one classification, the analysis was likely to be complete and unaffected by the three remaining factors.
Reasons independent contractor rule has been withdrawn
The Biden administration’s DOL has withdrawn the independent contractor rule for several reasons, including that:
- The independent contractor rule was in tension with both the Fair Labor Standards Act (FLSA) and relevant judicial precedent.
- The independent contractor 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 resulted in workers losing FLSA protections due to the narrowing of the facts and considerations comprising the analysis of whether a worker is an employee or an independent contractor.
In connection with the decision to withdraw the independent contractor rule, DOL Secretary of Labor Marty Walsh stated that “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.”
Effect of withdrawal of independent contractor rule
The Biden administration’s DOL is not proposing replacing with withdrawn independent contractor rule with a new rule at this time. For now, withdrawal of the Trump-era independent contractor rule means a return to the longstanding DOL standard for worker classification, a multi-factor “economic realities test” that considers the totality of the circumstances, and under which no single factor is determinative and the list of factors to be considered is not exhaustive. For more information, see DOL Fact Sheet #13. Since the Trump-era independent contractor rule never went into effect, the withdrawal of the rule is likely to have little impact on companies. However, to the extent that any company changed how they classified their independent contractor relationships based on the Trump-era independent contractor rule, now is the time to reevaluate such classifications under the prior independent contractor rule, which is now back in effect.
President Biden has expressed his support for the ABC Test for independent contractor classification as the federal standard. The ABC Test, which is the rule in certain jurisdictions including California and Massachusetts, generally provides that a worker is an employee rather than an independent contractor unless the hiring company can establish that (A) the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact, (B) the worker performs work that is outside the usual course of the hiring entity’s business; and (C) the worker is customarily engaged in an independently established trade, occupation, or business. The ABC Test makes it much more difficult for companies to classify workers as independent contractors. However, enacting the ABC Test as the federal standard for worker classification would require working with Congress to pass legislation. In any event, any federal rule will have little impact in states that have stricter tests for independent contractor classification.
Please do not hesitate to contact us if you have any questions about the classification of your company’s workers.