Withdrawal of the FLSA Independent Contractor Rule – Continuing Uncertainty
By: Karuna S Brunk
On May 6, 2021, the U.S. Department of Labor (“DOL”) announced that, effective immediately, it would withdraw the Trump-era “Independent Contractor Rule” (the “Rule”). The Trump DOL had promulgated the Rule in an effort to instruct businesses on how to determine if a worker is an independent contractor or an employee, entitled to the protections outlined in the Fair Labor Standards Act (“FLSA”).
Generally, under the FLSA, all non-exempt employees are guaranteed a federally-established minimum wage and entitled to premium overtime pay for any hours worked over 40 in a workweek. The FLSA specifically exempts independent contractors from its protections, and, thus, the FLSA’s minimum wage and overtime protections do not apply to independent contractors. Historically, courts and the DOL have relied upon an “economic reality” test to determine whether an employment relationship exists between a worker and an employer. The “economic reality” test was originally articulated in United States v. Silk, 331 U.S. 704, 712 (1947) and applied to the FLSA in Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947). The relevant factors include:
- The extent to which the services rendered by the worker are an integral part of the employer’s business operations;
- The permanency of the relationship;
- Whether the worker has invested in his/her own facilities and equipment to perform the work;
- The nature and degree of control by the employer;
- The worker’s opportunity for profit or loss;
- The amount of initiative, skill, judgment, or foresight required for the success of the worker; and
- Whether the worker owns or operates an independent business organization.
These factors often resulted in inconsistent application with no bright line definition of employee or independent contractor.
The Rule was originally published on January 7, 2021, with an effective date of March 8, 2021. It focused primarily on factors 4 and 5 – the nature and degree of control by the worker and the employer and the worker’s opportunity for profit or loss – with the idea that these factors ultimately determined whether an individual was an independent contractor or an employee. Under the Rule, the other factors of the “economic reality” test would serve as guidance if the evidence relating to the two primary factors were not conclusive.
The Biden Administration changed course, first by announcing on February 5, 2021, that it would delay the Rule’s effective date, then on March 12, 2021, by proposing to withdraw the Rule, and, lastly, by ultimately withdrawing it altogether on May 6, 2021. In its withdrawal announcement, the DOL reasoned that the Rule undermined the longstanding “economic realities” test in the court system. Additionally, Secretary of Labor Marty Walsh noted that the DOL was concerned that the Rule would undermine worker rights – “too often, workers lose important wage and related protections when employers misclassify them as independent contractors.”
The uncertainty and inconsistent application of the “economic reality” test continues. Additionally, employers should be aware that the current DOL’s enforcement efforts will likely focus on the misclassification of workers – this is especially relevant for those workers in in the “gig economy.”
FLSA violations come with steep penalties, including double damages (double the owed wages) and payment of a plaintiffs’ attorneys’ fees and costs. These cases often are prosecuted on a class-wide basis and can wreak havoc on a business. We recommend that employers review their employee and independent contractor classifications to ensure that they are not misclassifying workers. Experienced employment lawyers at DiMonte & Lizak can audit your employment practices and proactively protect you from wage and hour lawsuits that could be around the corner.