Independent Contractor Analysis – DOL Withdraws Final Rule

The U.S. Department of Labor (“DOL”)  issued a statement withdrawing its recently enacted final rule to clarify the independent contractor classification under the Fair Labor Standards Act (FLSA). The withdrawal will be effective May 6. According to the DOL , the goal in withdrawing the rule is to preserve employee protections under the FLSA, including those relating to overtime and minimum wage.

In January of 2021, the DOL issued a final rule that provided a set of standards for determining when an individual would be classified as an independent contractor. The test purported to provide further structure and clarity on independent contractor status under the FLSA. The test consisted of the following two core factors: (1) the nature and degree to which the worker exercises control over the work, and (2) the worker’s opportunity for profit or loss. The final rule also proposed three other factors to be considered in the event these two core factors did not yield a clear determination.

What does this mean for employers?   Since the final rule had not yet taken effect at the time of its withdrawal, this may not be a drastic change for most employers. Nevertheless, employers must continue to use the seven-factor economic realities test, which includes the following factors:  

  1. The extent to which the services rendered are an integral part of the principal’s business.
  2. The permanency of the relationship.
  3. The amount of the alleged contractor’s investment in facilities and equipment.
  4. The nature and degree of control by the principal.
  5. The alleged contractor’s opportunities for profit and loss.
  6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
  7. The degree of independent business organization and operation.

Unlike the test explained in the January rule, the economic realities test does not weigh any single factor or pair of factors more heavily than another, and the list is non-exhaustive meaning courts and employers must consider other scenario-specific facts in determining independent contractor versus employee status.

Employers can contact the attorneys at York Bowman Law, LLC for more information.