On May 5, 2021, the U.S. Department of Labor (DOL) withdrew its prior rule on the classification of independent contractors. The existing rule from the prior administration made it easier for businesses to classify workers as independent contractors, rather than employees. The new announcement came from the DOL’s Wage and Hour Division and the withdrawal of the existing rule becomes effective upon publication on May 6, 2021. The announcement can be accessed here.
This is a critical issue, especially given the rise in workers in the so-called “gig economy” that includes freelance or temporary workers who perform services such making deliveries, writing online content, and coding software.
The existing rule was short-lived as it had only been announced in January 2021. Importantly, while the DOL withdrew its prior Independent Contractor Rule, it did not release any new guidance. The DOL recognized that “Numerous companies, trade associations, business advocacy organizations, law firms, and individual commenters submitted comments opposing the Department’s proposal to withdraw the Independent Contractor Rule, including several commenters who identified themselves as current or former independent contractors.” However, the DOL ultimately concluded: “the Department does not believe that the Independent Contractor Rule is fully aligned with the FLSA’s text or purpose, or with decades of case law describing and applying the multifactor economic realities test.”
The withdrawal of the prior rule will almost certainly result in an expansion of the number of workers who are considered employees, instead of independent contractors. As a result, more individuals are expected to gain entitlement to minimum wage, overtime pay, and other benefits from the Fair Labor Standards Act (FLSA) and other laws. Whether there will be a resulting increase in class action claims by large groups of contractors claiming they were misclassified as employees remains to be seen.
The withdrawal of the prior rule, and the lack of new guidance from the DOL, increases the need for businesses to carefully consider whether workers are properly classified as independent contractors or employees using prior case law. This analysis involves what the DOL calls a “multi-factor balancing test.” This fact-dependent analysis examines a multitude of factors, including whether the business has the right to control the performance of the work, whether the worker has invested in his or her own equipment, and the worker’s opportunity for profit and loss. Until the DOL releases new guidance, business owners and workers can anticipate uncertainty in the market and inconsistent results in the court system.
Roger W. Feicht is a member of Gunster’s Labor & Employment Practice, which counsels employers on issues related to employee classification, and litigates claims related to claims for discrimination, harassment, and non-competition agreements in state and federal court.