On May 5, the U.S. Department of Labor (DOL) withdrew a Trump-era final rule that would have made it easier for employers to designate workers as independent contractors rather than employees under the Fair Labor Standards Act (FLSA).
The rule, titled “Independent Contractor Status under the Fair Labor Standards Act,” was published on January 7, 2021, at the tail end of the Trump administration, and was scheduled to take effect on March 8.
The proposed rule would have instituted an “economic dependence” test to determine whether workers qualified as employees, considering two “core” factors: (1) the nature and degree of the worker’s control over his work (including whether the worker is required to work exclusively for the employer during the engagement, or has a non-compete agreement afterward); and (2) the opportunity for the worker to sustain financial profit and loss.
If the two “core” factors did not align in favor of either independent contractor or employee status, three other factors would be considered: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the worker and the potential employer; and (3) whether the work is part of an integrated production process of the employer.
The proposed rule was seen as more friendly to employers because it would have made it easier for them to classify workers as independent contractors rather than employees under the FLSA. The test also would have provided clarity to employers seeking to classify their workforces, while permitting flexibility for the use of independent contractors in the evolving work structures of the “gig economy.”
Changes Under the Biden Administration
One of the Biden administration’s first moves was to delay unpublished rulemaking from the previous administration, and the independent contractor rule was pushed until mid-May. On March 12, 2021, the DOL proposed rescinding the rule and invited public comment, expressing concerns that the rulemaking was inconsistent with U.S. Supreme Court precedent as well as the purpose of the statute.
Finally, on May 5, the DOL announced it had decided to rescind the rulemaking, reverting back to the prior standard. The DOL determined that the rule’s elevation of two “core” factors conflicted with the FLSA’s text and purpose, saying the “cornerstone of the FLSA is the Act’s broad definition of ‘employ.’” Instead, the DOL decided its previous multifactor test better met the text, purpose, and current interpretation of the FLSA.
As described in the DOL’s notice rescinding the rulemaking, under the previous (and now renewed) standard, courts consider six non-exhaustive factors in determining worker status: (1) the degree of the employer’s right to control the manner in which the work is to be performed; (2) the worker’s opportunity for profit or loss depending upon his or her managerial skill; (3) the worker’s investment in equipment or materials required for his or her task, or employment of helpers; (4) whether the service rendered requires a special skill; (5) the degree of permanence of the working relationship; and (6) whether the service rendered is an integral part of the employer’s business.
What’s Next for Worker Classification
It is unlikely this rulemaking decision will be the final destination for worker classification under the current administration. During the 2020 campaign, then-candidate Biden campaigned on a platform that included a pledge to establish a federal “ABC test” for worker classification for “all labor, employment, and tax laws.” The ABC test, which has been applied by state courts in California and Massachusetts, among others, is seen as more likely to classify workers as employees rather than independent contractors.
Under the ABC test, a worker is presumed to be an employee unless the employer can establish: (1) the worker is free from the control and direction of the hiring entity in connection with the performance of work, both in fact and under the contract for the performance of work; (2) the worker performs work that is outside the usual course of business for the employer; and (3) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed under the contract.
The ABC test would apply to labor organizing under the Protecting the Right to Organize (PRO) Act passed by the U.S. House of Representatives in March. The Biden DOL and Congressional Democrats appear to be aligned and committed to expanding who qualifies as an employee, and elimination of the Trump-era rulemaking appears to be a first step toward that goal.