By:  Francine Foner, Esq., and Ty Hyderally, Esq.

On May 5, 2021, the Department of Labor (DOL) announced it was overturning a rule established during the Trump administration that permitted employers to more easily classify workers as independent contractors, rather than employees.  This allowed employers to avoid having to pay such workers overtime and comply with other wage protections under the Fair Labor Standard Act (FLSA), which applies to employees, but not independent contractors.  The Trump-era “Independent Contractor Rule” changed the longstanding manner in which the DOL had defined who is an independent contractor, from considering multiple factors to considering only two factors: The control exerted by the employer and the worker’s opportunity for profit or loss.

Before this policy change, the DOL considered six factors in classifying an employee as an independent contractor, including: the amount of control the employer had over the work, the level of specialized skill needed by the worker, any investment the worker made in their business operations and the permanence of a relationship between the worker and employer.  By limiting the test to consider only the control by the employer over the employee and the worker’s share in profit or loss, many workers who had traditionally been entitled to overtime and other wage protections were no longer protected.

According to the DOL’s website, after the Department reviewed approximately 1,000 comments submitted in response to a notice of proposed rulemaking on March 12, 2021 (See 86 FR 14027), it decided to rescind the two-factor Independent Contractor Rule.  As the DOL explains, “the Department believes that the [Independent Contractor] Rule is inconsistent with the FLSA’s test and purpose, and would have a confusing and disruptive effect on workers and businesses alike due to its departure from longstanding judicial precedent.” (https://www.dol.gov/agencies/whd/flsa/2021-independent-contractor).

The new final rule, which re-establishes the traditional factors considered to determine whether a worker is an independent contractor:

• Reaffirms 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).

• Identifies 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.

• Identifies 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.

• Provides that the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible; and

• Provides six fact-specific examples applying the factors.

Id.

The DOL’s action is a relief for many employees who would otherwise lose the protections of the FLSA, contrary to the intention and purpose of the FLSA.

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