Impact of the Biden Administration DOL on the Independent Contractor Final Rule
There has been a lot of confusion concerning the Final Rule introducing Part 795 of CFR Title 29 and expressly adopting the long-standing economic realities test for evaluating independent contractor status under the Fair Labor Standards Act (FLSA). Under the proposed rule, the U.S. Department of Labor (DOL) narrowed the interpretation of the independent contractor status under the FLSA.
The FLSA requires covered employers to pay their non-exempt employees at least the Federal minimum wage for every hour worked and overtime pay for every hour worked over 40 in a workweek and keep certain records regarding their employees. A person who performs services for an individual or entity as an independent contractor is not considered as an employee under the Act. Thus, the FLSA does not require employers to pay an independent contractor either the minimum wage or overtime pay, nor does it require that person to keep records regarding that independent contractor. Courts and the DOL, however, require an evaluation of the extent of the worker’s economic dependence on the potential employer and have developed a multifactor test to analyze whether a worker is an employee or an independent contractor under the FLSA.
The Final Rule attempted to limit the economic realities inquiry into whether the worker is considered to be a pseudo employee or an independent contractor to the following five factors (as opposed to the previous tests used by the DOL, IRS and federal courts):
- The Control Test. This test confirms the independent contractor status if the individual exercised “substantial control over key aspects of the performance of the work,” such as setting their own schedule, selecting their own projects, or having the ability to work for others. Control would not be demonstrated by requiring the individual to:
- comply with specific legal obligations;
- satisfy health and safety standards;
- carry insurance;
- meet contractually agreed-on deadlines or quality control standards; or
- comply with other similar terms typical of contractual business relationships.
- The Individual’s Opportunity for Profit or Loss. This test takes into consideration of the individual’s exercise of initiative or management of their investment or capital expenditure. The ability to affect earnings only by working faster or more hours would not support independent contractor status.
- The Specialized Skill Test. The DOL considered the extent the work required specialized training or skill that was not provided by the company compared to work that required no specialized training or skill or only that which the worker relied on the company to provide.
- The Working Relationship. Independent contractor status would be supported by a working relationship that was sporadic or definite in duration.
- Whether the work was a component of the company’s integrated production process. This factor was distinguishable from the concept of importance or centrality to the company’s business.
These proposed five factors were not exhaustive, and no single factor was dispositive, but the degree of control and opportunity for profit or loss were typically given greater weight as the “most probative” “core factors”. If both core factors supported the same classification, independent contractor or employee, there was a “substantial likelihood” that the classification was appropriate.
The proposed rule also provided several illustrative examples, including a tractor-trailer owner-operator, an app-based home repair service worker, home renovation and repair services worker, a seasonal resort housekeeper, a part-time editor, and a freelance journalist.
The DOL intended for employers, employees, and courts to use the interpretations to better understand employers’ obligations and employees’ rights under the FLSA while rescinding any conflicting prior administrative rulings, interpretations, practices, or enforcement policies were expressly rescinded. (29 C.F.R. §§ 795.100 to 795.120.)
The rule was first published on January 7, 2021 and was scheduled to take effect on March 8, 2021. However, in a Final Rule published on March 4, 2021, the DOL under the Biden administration delayed the effective date until May 7, 2021 but later announced a withdrawal of the independent contractor Final Rule effective May 6, 2021. The agency did not propose new rulemaking.
Employers should consult employment counsel concerning developments affecting independent contractor classification under the Biden administration, including any new rulemaking.