DOL Ditches Rule Regarding Independent Contractor Test Under FLSA

The debate on how employers classify independent contractors and employees is still unsettled. The U.S. Department of Labor (DOL) just withdrew its previously-issued independent contractor rule, which aimed to clarify the standard for employee versus independent contractor under the Fair Labor Standards Act (FLSA).

How did the rule determine worker status?

Under the rule, worker status would have been determined based on an economic reality test that looked at two core factors:

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

Three other factors would serve as additional guideposts in the test:

1. The amount of skill required for the work
2. The degree of permanence of the working relationship between the worker and potential employer
3. Whether the work is part of an integrated production unit, i.e., whether the worker performs duties separate from the potential employer’s production process

Why did the DOL withdraw the rule?

The independent contractor rule was set to kick in on March 8, but it was delayed until May 7 while the DOL solicited comments on a proposed rule to rescind it. 

The DOL explained that the withdrawal of the rule would “maintain workers’ rights to the minimum wage and overtime compensation protections of the FLSA.” It listed the following reasons, among others, for the withdrawal:

• The independent contractor rule was in tension with the FLSA’s text and purpose, as well as relevant judicial precedent.
• The rule’s prioritization of two “core factors” to decide employee status under the FLSA would have undermined the longstanding balancing approach of the economic realities test and court rulings requiring a review of the totality of the circumstances related to the employment relationship.
• The rule would have narrowed the facts and considerations used to analyze whether a worker is an employee or an independent contractor, which would result in workers losing FLSA protections.

Does this change the standard for how employers classify workers?

The standard for employee versus independent contractor under the FLSA remains unchanged. As the DOL has previously recognized, the employer-employee relationship is tested by “economic reality” rather than “technical concepts.”

There is no single rule or test to decide whether someone is an independent contractor or an employee for purposes of the FLSA. Instead, it is the total activity or situation that controls. In analyzing the issue, courts have looked at factors such as the:

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 independent contractor
7. Degree of independent business organization and operation

Please contact Jess Huffman or any member of Phelps’ Labor and Employment team if you have questions or need compliance advice and guidance.