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Update on Federal Independent Contractor Rule

On May 5, the U.S. Department of Labor (DOL) announced the official withdrawal of the prior administration’s independent-contractor rule (announced on January 6, 2021), which would have eased the criteria for businesses to classify workers as independent contractors rather than employees.

The Department is withdrawing the rule for several reasons, including:

  • 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” for determining employee status under the FLSA would have undermined the longstanding balancing approach of the economic realities test and court decisions requiring a review of the totality of the circumstances related to the employment relationship.
  • The rule would have narrowed the facts and considerations comprising the analysis whether a worker is an employee or an independent contractor, resulting in workers losing FLSA protections.

The FLSA includes provisions that require covered employers to pay employees at least the federal minimum wage for every hour they work and overtime compensation at not less than one-and-one-half times their regular rate of pay for every hour over 40 in a workweek. FLSA protections do not apply to independent contractors.

In addition to preserving access to the FLSA’s wage and hour protections, the department anticipates that withdrawing the independent contractor rule will also avoid other disruptive economic effects that would have been harmful to workers had the rule gone into effect.

Next Steps for Employers

It is unlikely that a new independent contractor rule will be issued from the DOL in the foreseeable future, so employers must still rely on the DOL’s prior analysis for determining worker classification. The DOL has traditionally analyzed several factors to consider whether a worker is an independent contractor or employee and looked at “the totality of the circumstances.” The prior analysis relied on an intensive, fact-based multifactor approach which considered the following six specific factors:

  1. The nature and degree of control by the employer;
  2. The worker’s opportunity for profit or loss;
  3. The worker’s investment in equipment or materials required for his or her task;
  4. Whether the service rendered requires an essential skill;
  5. The degree of permanence of the working relationship;
  6. The degree to which the services rendered are an integral part of the employer’s business.

Employers are encouraged to consult with their legal counsel and/or tax professional for additional guidance on federal and state laws regarding worker classification.

HR Works, headquartered in Upstate New York, is a human resource management outsourcing and consulting firm serving clients throughout the United States for over thirty years. HR Works provides scalable strategic human resource management and consulting services, including: affirmative action programs; benefits administration outsourcing; HRIS self-service technology; full-time, part-time and interim on-site HR managers; HR audits; legally reviewed employee handbooks and supervisor manuals; talent management and recruiting services; and training of managers and HR professionals.