Biden Administration Withdraws Independent Contractor Rule

The Department of Labor (DOL) withdrew the Trump Administration’s final rule that clarified the standard for determining employee versus independent contractor status under the Fair Labor Standards Act (FLSA).

The withdrawal of the final rule took effect yesterday. Independent contractors are not entitled to the federal minimum wage, overtime pay and other benefits that covered employees receive under the FLSA.

DOL will not replace the Trump administration independent contractor rule with a new one, instead falling back on the decades old “economic realities” test.

In withdrawing the prior administration’s independent contractor rule, DOL said it “believed that the Rule is inconsistent with the 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.”

The Trump Administration issued its final independent contractor rule before leaving office on January 6, 2021, which would have:

— 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 explains two “core factors” that 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 are:

     — 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.

— The actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.

— Provides six fact-specific examples applying the factors.

While DOL said it does not plan to issue a replacement rule at this time, President Biden has indicated his support for an “ABC test” like the one used in California. California, Illinois, Massachusetts and New Jersey use a more stringent independent contractor test.

If DOL interprets the economic realities test like these States, the following factors could come into play:

— Whether the worker controls and directs the performance of the work free from the hiring entity.

— Whether the worker performs tasks that are outside the usual course of the hiring entity’s business.

— Whether 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.

Marketers should expect the Biden DOL to favor classification of workers as employees, rather than as independent contractors.

Companies using independent contractors should evaluate whether these individuals are properly classified, recognizing that this issue is going to be a focus of the new administration.

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