DOL’s Withdrawal of the “Independent Contractor Rule” – Another Reason to Evaluate Independent Contractor Relationships in Your Organization

Earlier this summer, the U.S. Department of Labor announced its withdrawal of the “Independent Contractor Rule” (the “Rule”) under the Fair Labor Standards Act, that was scheduled to go into effective first on March 8, 2021 (prior to the Biden administration’s postponement), and then on May 7, 2021.

The Rule would have changed the longstanding “economic realities test” and “totality of the circumstances” approach that courts, including the U.S. Supreme Court, have taken in determining whether an individual is misclassified as an independent contractor, instead of an employee.  In an announcement published by the U.S Department of Labor, the Wage and Hour Division provided support of its withdrawal of the Rule, explaining that “[t]he rule would have narrowed the facts and considerations comprising the analysis whether a worker is an employee or an independent contractor, resulting in workers losing FLSA protections.” 

What does this mean for employers?  It means that there is further reinforcement for ensuring that individuals classified as an independent contractors are truly “independent’ from the enterprise.  Scrutinize your independent contractor relationships, especially those which are long-term or deeply embedded in the enterprise.  Are they correctly classified? In determining how to classify an individual, or whether an individual should be re-classified, employers continue to be bound by what is commonly-referred to as the “economic realities test” or the “totality of the circumstances test”.  The U.S. Department of Labor’s Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA) states, “while there is no single rule of rest for determining whether an individual is an independent contractor or an employee for purposes of the FLSA…[t]he [U.S. Supreme] Court has held that it is the total activity or situation which controls.”  Factors to consider include but are not limited to, the following:

1.       Extent to which the services rendered are an integral part of the principal’s business;

2.       Permanency of the relationship;

3.       Amount of the alleged contractor’s investment in facilities and equipment;

4.       Nature and degree of control by the principal;

5.       Alleged contractor’s opportunities for profit and loss;

6.       Amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed contractor;

7.       Degree of independent business organization and operation.

Employers should be mindful that the specific factors comprising the “economic realities test”, and the weight given to each factor, can vary significantly from jurisdiction to jurisdiction pursuant to statute, case law, or both.