On May 5, 2021, the U.S. Department of Labor (DOL) eliminated a Trump administration end-of-term rule for determining whether workers should be classified as independent contractors or employees under the Fair Labor Standards Act. The former administration rolled out the rule on Jan. 7, 2021, and though it went through the full rulemaking process, it never took effect.
Withdrawn Rule and Revised Economic Realities Test
The withdrawn rule would have simplified the “economic realities test” for determining whether a worker is properly classified as an independent contractor. The simplified economic realities test would have focused on two core factors, while considering three other factors to guide the inquiry into a worker’s status as an employee or independent contractor. The two core factors would have been:
- the nature and degree of control over the work; and
- the worker’s opportunity for profit or loss.
The three additional guiding factors would have been:
- the amount of skill required for the work;
- the degree of permanence of the working relationship between the worker and the employer; and
- whether the work is part of an integrated unit of production.
These additional factors were intended only as guiding factors in the inquiry, not as an exhaustive list of factors considered.
Current Economic Realities Test
As it stands, the DOL’s current guidance on the factors considered under the economic realities test, last updated in July 2008, remains in place. These factors include:
- the extent to which the services rendered are an integral part of the principal’s business;
- the permanency of the relationship;
- the amount of the alleged contractor’s investment in facilities and equipment;
- the nature and degree of control by the principal;
- the alleged contractor’s opportunities for profit and loss;
- the amount of initiative, judgment or foresight in open market competition with others required for the success of the claimed independent contractor; and
- the degree of independent business organization and operation.
Withdrawal and Dispute
DOL’s withdrawal of this rule is not unexpected. On Feb. 5, 2021, DOL published a proposal to delay the Trump administration rule’s effective date until May 7, 2021, 60 days after the original effective date of March 8, 2021. On March 4, 2021, after considering the approximately 1,500 comments received in response to that proposal, DOL published a final rule delaying the effective date of the rule as proposed. DOL explained that the delay was consistent with a Jan. 20, 2021, memorandum from the assistant to the U.S. president and chief of staff, titled “Regulatory Freeze Pending Review.”
On March 12, 2021, DOL proposed to withdraw the rule prior to its effect, an action that met opposition from business groups. On March 26, 2021, business groups challenged the proposed withdrawal in court, arguing that the DOL failed to provide a meaningful notice and comment period in violation of the Administrative Procedure Act. This case, however, remains in its early stages.
Possible Alternatives and Consequences for Employers
Since his inauguration and in his campaign, President Biden has signaled that he intends to make worker-friendly policies a priority in his administration. Biden has stated that he supports an “ABC Test” for independent contractors, similar to the one California adopted in 2018, imposing a fairly restrictive standard for a person to qualify as an independent contractor.
Regardless of the test used, the Biden-era DOL, under Secretary Marty Walsh, likely will favor classification of workers as employees, rather than as independent contractors. For example, as recently as April 30, 2021, Walsh stated that, in many cases, gig workers should be classified as employees. Companies that utilize independent contractors should consider evaluating whether these individuals are appropriately classified, recognizing that this is a point of focus for the Biden-era DOL.
For further information or questions about this legal alert, please contact the authors, your McGuireWoods contact or a member of the firm’s labor and employment team.