In a widely expected move, the U.S. Department of Labor has proposed to withdraw a rule published in the last days of the Trump administration that changed the definition of independent contractor.
The Fair Labor Standards Act, which sets forth laws regarding minimum wage and overtime requirements, applies only to employees. But the law’s definitions of “employee” are extremely broad, and the issue of who is an employee and who is an independent contractor has been the subject of many a court case.
A Trump-era effort to change the definition under FLSA, titled “Independent Contractor Status under the Fair Labor Standards Act,” was published on Jan. 7. But this month, the DOL’s Wage and Hour Division published a notice of proposed rulemaking proposing to withdraw that rule.
The independent contractor rule was put on hold by the incoming Biden administration as part of its review of “midnight regulations,” and in fact was one of the examples specifically called out by his transition team in announcing that move.
The rule change that the DOL now wants to withdraw would have adopted an “economic reality” test to determine a worker’s status as an employee or an independent contractor. The test would consider whether a worker is in business for himself or herself (independent contractor) or is economically dependent on a putative employer for work (employee).
Much of the trucking industry hailed the change, with the American Trucking Associations saying the final rule addressed issues such as long-term relationships not automatically implying “control” of the worker.
The Teamsters, however, opposed the change and asked the Biden administration to negate the rule.
As the DOL explained in its proposal to withdraw the new definition, although the Supreme Court has repeatedly emphasized that the test for whether an individual is an employee under the FLSA is one of “economic reality,” it also has cautioned that no single factor is controlling and that the decision of whether a worker is an employee or contractor must take into account “the circumstances of the whole activity.”
That has led to a “multifactor” test for determining independent contractor status. The Trump-era rule said that that test, “as currently applied, has proven to be unclear and unwieldy.”
On February 5, the department published a proposal to delay the Independent Contractor Rule's effective date until May 7, 60 days after the original effective date of March 8. On March 4, 2021, the Department published a final rule delaying the effective date of the Independent Contractor Rule as proposed. On March 12 it issued the proposal to withdraw the rule.
The reasons for the withdrawal, according to the NPRM, include:
• The rule's standard has never been used by any court or by the Wage and Hour Division of the DOL and is not supported by the FLSA’s text or case law.
• Although the intent of the rule was to provide clarity, it would also introduce several concepts the analysis that neither courts nor WHD had previously applied, which could lead to more confusion rather than the intended clarity.
• The rule did not fully consider the likely costs, transfers, and benefits that could result from the rule.
“This concern is premised in part on WHD's role as the agency responsible for enforcing the FLSA and its experience with cases involving the misclassification of employees as independent contractors. The consequence for a worker of being classified as an independent contractor is that the worker is excluded from the protections of the FLSA. Without the protections of the FLSA, workers need not be paid at least the federal minimum wage for all hours worked, and are not entitled to overtime compensation for hours worked over 40 in a workweek. These impacts can be significant and must be evaluated further. In addition, a recent Presidential Memorandum began a process for agencies to better ‘take into account the distributional consequences of regulations.’ WHD also questions whether a rule that could increase the number of independent contractors, effectuates the FLSA's purpose, recognized repeatedly by the Supreme Court, to broadly provide employees with its protections.”
The NPRM also notes that the withdrawal would not be disruptive because the rule has not yet taken effect.
Comments are due by April 12.