The Employee Classification Rule That Never Really Was

KPM Employer Update link to blog.

14 May The Employee Classification Rule That Never Really Was

On January 6, 2021, the U.S. Department of Labor (DOL), then under the Trump administration, announced a final rule regarding the employee-versus-independent-contractor standard under the Fair Labor Standards Act (FLSA). The effective date of the final rule was March 8. However, its future was uncertain at the time given that a new presidential administration was incoming. Now, the final rule’s fate has been decided.

The Final Rule
In the January announcement, the DOL said the final rule reaffirmed an ‘economic reality’ test to determine whether someone is in business for him- or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).

The agency also identified and explained two ‘core factors’ that it said are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him- or herself:

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

In addition, the DOL identified three other factors that may serve as guideposts in the analysis — particularly when the two core factors do not point to the same classification. The factors were:

  • The amount of skill required for the work
  • The degree of permanence of the working relationship between the worker and potential employer
  • Whether the work is part of an integrated production unit

Essentially, the final rule said that the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible. The rule would have generally found ‘gig economy’ and certain other workers to be independent contractors for purposes of federal labor law.

The Withdrawal
On March 12, the DOL, now under the Biden administration, issued a proposal to withdraw the final rule. In early May, the agency announced its decision to finalize the withdrawal. The agency gave several reasons for doing so.

First, the DOL believes the rule was in tension with the FLSA’s text and purpose, as well as relevant judicial precedent. Second, the rule’s prioritization of two ‘core factors’ for determining employee status under the FLSA, in the agency’s opinion, would have undermined the longstanding balancing approach of the economic realities test and relevant court decisions. Such court decisions typically require a review of the totality of circumstances related to the employment relationship.

Finally, the DOL found that the rule would have narrowed the facts and considerations comprising the analysis of whether a worker is an employee or an independent contractor, resulting in workers losing FLSA protections.

Long-Standing Problem
The employee versus independent contractor question is a long-standing source of confusion for employers, which sometimes results in costly tax consequences and penalties. Contact us for further information about properly classifying workers.