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DOL withdraws new independent contractor test

06/03/21

Author: ADP Admin/Tuesday, June 1, 2021/Categories: Bulletin News, Compliance Corner , Federal Compliance Update

The Department of Labor (DOL) has published a final rule that withdraws changes to the test for determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). The changes were scheduled to take effect May 7, 2021.

Background:

The DOL has traditionally used an "economic realities" test to determine whether workers are covered by the FLSA and subject to minimum wage, overtime, and other wage and hour rules. This test looks at the following factors, each carrying equal weight:

  • The extent to which the services rendered are an integral part of the principal's business.
  • The permanency of the relationship.
  • The amount of the alleged contractor's investment in facilities and equipment.
  • The nature and degree of control by the principal.
  • The alleged contractor's opportunities for profit and loss.
  • The amount of initiative, judgment, or foresight in open market competition with others required for the contractor's success.
  • The degree of independent business organization and operation.

Withdrawn Changes:

Put forward by the Trump Administration, the now withdrawn changes would have defined and clarified how the economic realities test is applied. Specifically, the changes would have sharpened the test into five distinct factors, including:

  • Two "core factors" that would have carried more weight in the analysis (the nature and degree of the worker's control over the work and the worker's opportunity for profit or loss based on initiative and/or investment).
  • Three other factors would have served as additional guideposts in the analysis: the amount of skill required for the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work is part of an integrated unit of production.

These and other changes to the independent contractor test for the FLSA are withdrawn and will not go into effect. The DOL said it is withdrawing the changes because:

  • They would have been in tension with the FLSA's text and purpose, as well as relevant judicial precedent.
  • The 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.
  • They 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.

Compliance Recommendations:

Employers should remember that the FLSA and other laws have different tests to determine whether a worker is an independent contractor, and some states have their own independent contractor tests. Before classifying and treating any individual as an independent contractor, perform all applicable tests and consult legal counsel if needed. Please contact your dedicated service professional with any questions.

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Tags: 06/03/21

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