On May 6, 2021, the Department of Labor (“DOL”) issued a final rule, effective immediately, withdrawing a pro-business independent contractor rule that would have made it easier for businesses to classify workers as independent contractors, rather than as employees who are entitled to minimum wage and overtime pay under the Fair Labor Standards Act. Earlier this year, the DOL delayed the effective date of the “Independent Contractor status under the Fair Labor Standards Act” rule published by the DOL two weeks before President Trump left office. Delaying the rule’s effective date allowed the Biden Administration to re-open the rulemaking process and pave the way for withdrawing the regulation, which would have reduced the long-standing, complex six-factor independent contractor test to just two factors – the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss. The narrower test was favored by many companies that rely on independent contractors who perform on-demand services, including drivers, delivery services and child care, and are afforded the flexibility to work when, where and how they want.
According to Jessica Looman, the DOL’s principal deputy administrator for the Wage and Hour Division, “Misclassification of employees as independent contractors presents one of the most serious problems facing workers today.” Labor Secretary Marty Walsh further explained that withdrawal of the rule will help “preserve essential worker rights and stop the erosion of worker protections that would have occurred had the rule gone into effect.” The final rule issued this week did not include a new interpretation of when workers can function as independent contractors and when they must be classified as employees. Instead, companies will continue to be judged under the existing multi-factor test known as the “economic reality” test that the DOL and the courts have used for decades, unless and until the DOL issues more stringent regulations. President Biden campaigned on the promise of creating a federal standard for independent contractor classification, which he indicated would be consistent with the stringent multi-factor “ABC” test used in California for wage and hour and other claims and used in a majority of states for unemployment and workers’ compensation claims. Ballard Spahr’s Labor and Employment Group is following the latest developments on worker classification rules and regulations, on which we will continue to report.