The Department of Labor (“DOL”) is officially withdrawing the prior administration’s independent contractor rule. The DOL stated that the withdraw will maintain workers’ rights to the minimum wage and overtime compensation protections of the Fair Labor Standards Act (“FSLA”).
Traditionally, the DOL used the economic-reality test to consider whether a worker is an independent contractor or employee and looked at the totality of the circumstances concerning the worker’s employment. In comparison, the withdrawn rule applied a more limited economic-reality test that primarily considered only two factors:
- The nature and degree of control over the work; and
- The worker’s opportunity for profit or loss based on initiative and investment.
If those two core factors could not establish the worker’s employment status, then three other factors served as guideposts in determining employment status, which included:
- The amount of skill required for the work;
- The degree of permanence of the working relationship between the worker and the potential employer; and
- Whether the work is part of an integrated unit of production.
By prioritizing the core factors, the DOL deemed that the withdrawn rule undermined the longstanding balancing approach of the economic realities test and court decisions requiring a review of the totality of the circumstances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 DOL has yet to issue a new rule, however, President Biden has said he supports an “ABC” test similar to California’s independent contractor rule. Primarily, California has three factors that must be satisfied before a worker can properly be classified as an independent contractor:
- The worker is free from the control and direction of the hiring entity in connection with the performance of work;
- The worker performs tasks that are outside the usual course of the hiring entity’s business; and
- 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.B
While a new rule will eventually be issued by the DOL to replace the withdrawn rule, the DOL’s main concern at this time is preserving essential workers’ rights and preventing the erosion of worker protections. Thus, the takeaway for employers going into the future is that a new rule will most likely make it more challenging to classify workers as independent contractors.
