(May 6, 2021) - This week, the Department of Labor (DOL) repealed the Trump Administration's independent contractor rule under the Fair Labor Standards Act (FLSA). The DOL has also proposed the rescission of the Trump Administration's joint employer rule and sent a new proposed regulation to the White House Office of Information and Regulatory Affairs (OIRA) for review. Both moves signal a return to standards more likely to find an employment relationship.
Repeal of the Final Rule for Independent Contractor Status
After initially announcing a proposal to withdraw the independent contractor Final Rule during the Trump Administration's final days, on May 5, 2021 the DOL officially withdrew the rule, effective May 6, 2021. This resulted in a return to the FLSA's "economic realities test" to ascertain whether an individual is an employee or independent contractor.
The Final Rule revised the economic realities test to emphasize only two "core factors" and deemphasized the remaining four factors also considered under this test. The DOL's repeal of that rule means each of the following six factors of the economic realities test will be considered in classifying an independent contractor versus an employee:
- The extent to which the work performed an integral part of the employer's business;
- The worker's opportunity for profit or loss depending on his or her managerial skill;
- The extent of the relative investments of the employer and the worker;
- Whether the work performed requires special skills and initiative;
- The permanency of the relationship; and
- The degree of control exercised or retained by the employer.
As the independent contractor rule never went into effect, employers should continue to classify individuals as employees or independent contractors based on consideration of these six factors.
Proposed Rescission of the Final Rule for Joint Employer Status
In January 2020, the DOL published a Final Rule narrowing the definition of joint employer under the FLSA, which became effective March 16, 2020. The rule provided a four factor test to determine whether a joint employer relationship exists. The factors included whether the alleged joint employer:
- Hired or fired the employee;
- Supervised and controlled the work schedule or conditions of employment to a substantial degree;
- Determined the employee's rate and method of payment; and
- Maintained the employee's employment records.
In September 2020, the United States District Court for the Southern District of New York struck down the joint employer rule on the basis that the rule conflicted with, and unlawfully limited, the FLSA's definitions of "employer," "employee," and "employ." The Trump Administration DOL appealed the decision.
The Biden Administration DOL has issued a proposed rescission of this Final Rule, and has sent a proposed new regulation to the White House OIRA for review. This suggests that the DOL will release a new proposed joint employer rule once it receives approval to do so.
The Trump-era Final Rule for classification of individuals as independent contractors has officially been repealed, before it ever came into effect. Nevertheless, employers should carefully evaluate their classification procedures to ensure that they are still in line with the original economic realities test. Employers should also remain cognizant of state law nuances on the classification of independent contractors.
It is likely that the DOL will rescind and replace the Final Rule for joint employment, though the form of the replacement is presently unclear. For now, this Final Rule remains in effect for joint employment. Employers should continue operating under its scheme, but be prepared to shift upon new guidance from the DOL. Employers should also carefully review current practices for legal compliance.
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