DOL Proposes Withdrawal of Independent Contractor, Joint Employer Rules

On March 11, the U.S. Department of Labor (DOL) proposed withdrawing the independent contractor and joint employer final rules. The rules “would significantly weaken protections afforded to American workers under the Fair Labor Standards Act [FLSA],” the DOL stated.

Noting that independent contractors have no FLSA protections, the DOL proposed withdrawing the independent contractor rule, which was issued Jan. 7 and has not yet taken effect, stating that:

  • The rule adopted a new “economic reality” test to determine whether a worker is an employee or independent contractor under the FLSA.
  • Courts and the department have not used this test, and FLSA text and long-standing case law does not support it.
  • The rule would minimize other factors courts traditionally consider, making the economic test less likely to establish that a worker is an employee under the FLSA.

The DOL also proposed rescinding a final rule on joint employers that took effect in March 2020. A federal district court vacated most of the rule in September 2020.

Economic Reality Test

Under the economic reality test, two core factors are integral to determining whether someone is an independent contractor:

  • The nature and degree of control over the work.
  • The worker’s opportunity for profit or loss based on initiative and investment.

Three other factors that may serve as additional guideposts in the analysis 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.

The “ABC” Test

President Biden has said he supports an “ABC” test similar to California’s independent contractor rule. With some exceptions, California requires all three of the following factors to be met for a worker to be properly classified as an independent contractor:

  • The worker is free from the control and direction of the hiring entity in connection with the performance of the work.
  • The worker performs tasks that are outside the usual course of the hiring entity’s business.
  • The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

Other states, such as Illinois, Massachusetts and New Jersey, apply a similarly stringent independent contractor test.

No Replacement Yet

The DOL did not replace the independent contractor rule with a policy of its own on how to interpret worker status under the FLSA. That gives the agency options on whether to issue a new regulation or guidance that doesn’t require public input, which would be faster. The DOL nonetheless is seeking public input on the proposal to withdraw the independent contractor and joint employer rules by April 12.

Joint Employer Rule Issued Last Year

The DOL announced on Jan. 12, 2020, a final rule narrowing the definition of “joint employer” under the FLSA to provide clarity to businesses about franchise and contractor relationships.

Federal Judge Struck Down Major Parts of Rule

A federal judge in New York invalidated substantial portions of the DOL’s joint employer rule on Sept. 8, 2020. The judge ruled in favor of a coalition of state attorneys general who claimed that the rule weakens critical workplace protections. Among other arguments, the coalition said the rule conflicts with the protections Congress intended to provide under the FLSA and that the DOL violated the Administrative Procedure Act’s rulemaking process.