On May 6, 2021, the Department of Labor (DOL) withdrew its Independent Contractor rule. The withdrawal follows a March 2021 notice of proposed rulemaking issued by the DOL citing several reasons why the rule should be withdrawn. The rule, published on January 7, 2021, would have provided a new interpretation of who is an employee and who is an independent contractor under the FLSA. The FLSA requires employers to pay minimum wages and overtime to covered employees, but independent contractors do not have these protections.

Independent Contractor Analysis

For many years, various courts have applied a multifactor economic realities analysis when determining whether a worker is an employee or independent contractor. Among the factors considered: (1) the nature and the degree of control exercised by the alleged employer; (2) the amount of the alleged contractor’s investment in facilities and equipment (3) the degree to which the alleged employee’s opportunity for profit and loss is determined by the employer; (4) the skill and initiative necessary for performing the work; (5) the permanency of the relationship; and (6) the extent to which the work performed is an integral part of the employer’s business. Neither the presence nor the absence of any individual factor is determinative. DOL similarly has considered these six factors (or variations on these six factors) as well as the worker’s degree of independent organization and operation.

Independent Contractor Rule

As mentioned, the January 2021 Independent Contractor Rule would have provided a new interpretation of who is an employee and who is an independent contractor under the FLSA. It would have applied an economic dependence test under which two core factors – the nature and degree of control over the work and the worker’s opportunity for profit or loss – would have carried greater weight, minimizing other factors traditionally considered by the courts and DOL. Under the economic dependence test, a worker would be considered an employee if the worker is economically dependent on the employer for work and. If the worker is in business of himself/herself, then the worker would be considered an independent contractor.

DOL proposed to withdraw the Independent Contractor Rule in a notice of proposed rulemaking issued on March 12, 2021. According to the notice, DOL was proposing to withdraw the rule for several reasons, including: (1) the rule’s economic reality standard has not been used by the courts or DOL and the test is not supported by the FLSA text or longstanding case law; (2) the rule would minimize other factors traditionally considered by courts; and (3) the rule would not provide clarity – the intended purpose of the rule. After receiving over 1,000 comments in response to the notice, DOL decided to finalize the withdrawal. DOL stated that it believes that the rule is inconsistent with the FLSA, and would have a “confusing and disruptive effect” on workers and businesses alike due to its departure from longstanding judicial precedent. DOL is not issuing any regulatory guidance to replace the rule, so it can be anticipated that DOL will continue to apply the multifactor economic realities analysis.