Earlier this month, the Department of Labor (“DOL”) repealed its independent contractor rule, promulgated under the Trump administration, on whether to classify a worker as an independent contractor or employee entitled to minimum wage and overtime under the Fair Labor Standards Act. The rule was favorable for employers because it streamlined the independent contractor analysis in a way that protected independent contractor classification. The following article analyzes the rule and what its repeal means for employers.
Trump-era Independent Contractor Rule
Under the recently repealed rule, the DOL streamlined decades of common law to roll out its “economic realities test,” which focused on whether the worker was dependent on the employer for work. The DOL’s economic realities test consisted of five factors:
- The nature and degree of control that a worker has over his own work;
- The opportunity for profit or loss as a result of his personal investment;
- The amount of skill required for the position;
- The permanence of the working relationship; and,
- How integrated the worker’s role is to the employer’s overall operation.
Of these five factors, the first two carried the most weight. Under the repealed rule, an employer was substantially likely to have properly classified a worker as an independent contractor so long as the worker had control over his own work and had the opportunity for profit or loss as a result of his personal investment. This emphasis on the first two factors eased the burden for employers in properly classifying independent contractors. However, on May 7, 2021, the DOL repealed its rule following the recommendation of President Biden and critiques from stakeholders who advocated for greater protections for employees.
What does the repeal mean for employers?
Although the DOL has repealed its streamlined rule, the economic realities test remains part of the independent contractor analysis under the common law. The difference, however, is that most courts of appeals weigh the factors equally. Additionally, courts consider the five factors to be non-exhaustive and will consider additional factors and circumstances to evaluate the totality of the circumstances. So although the DOL has repealed its rule, its action does not overturn decades of precedent relying on the economic realities test which remain binding.
The Bottom Line
While the DOL has repealed its streamlined rule, employers may still find the rule to be a useful reference guide for the economic realities test factors with the proviso that the factors should be considered equally. Additionally, employers should consider the totality of the circumstances of their relationship with the worker including circumstances that may be unique to a particular industry. The ultimate question for an employer to answer in determining whether a worker is an independent contractor or employee is whether the worker is economically dependent on the employer.
Employers also should note that the analysis varies slightly when evaluating whether a worker is an employee or independent contractor in other contexts such as claims brought under Title VII or the Age Discrimination in Employment Act. Additional factors could include whether the employer furnishes the equipment used and the place of work; the method of payment; the manner in which the work relationship is terminated; whether annual leave is afforded; whether the worker accumulates retirement benefits; and tax allocation.