DOL Finalizes Employer-Friendly Independent Contractor Standard, But Future Is in Doubt

Author: Michael Cardman, XpertHR Legal Editor

January 6, 2021

The US Department of Labor (DOL) today issued final rule that could make it easier for businesses to classify workers as independent contractors rather than employees.

There were no substantive changes from the draft rule proposed last year, but the DOL added six examples of how the new rule would be applied under different scenarios.

The rule is scheduled to take effect March 8 - but it is likely to be frozen and possibly replaced.

Last week, President-Elect Joe Biden's transition team announced that one of his first acts in office will be to issue an executive order halting what he calls "midnight regulations" - those, such as the independent contractor rule, that were finalized during the lame-duck period between the election and the January 20 inauguration.

With Democrats favored to win control of the Senate following yesterday's run-off election in Georgia, there also is a chance that the independent contractor rule will be replaced with legislation establishing a more employee-friendly independent contractor test.

Even if the DOL's final rule survives in its current form, it would hardly represent the final word in independent contractor classification.

First of all, the rule applies only under the Fair Labor Standards Act (FLSA), which governs federal minimum wage and overtime requirements. A stricter standard would continue to apply under many other federal laws and under a complex patchwork of state laws - most notably, California, which recently established one of the strictest tests in the nation.

Also, courts may not necessarily follow the DOL's interpretation. Although regulations that undergo a public comment period are entitled to substantial deference from the courts, it is not a sure thing given the enormous body of existing case law interpreting independent contractor status under the FLSA.

When the rule was proposed last year, a DOL spokesperson speaking on background told XpertHR that the DOL believes the rule is "persuasive and will be followed by courts and useful to the public."

A Five-Factor Test

Currently, neither the FLSA nor its regulations define the term independent contractor. However, the federal courts have developed a relatively uniform set of factors to determine independent contractor status, commonly referred to as the economic realities test.

The DOL said this test, and the process of applying it, has lacked focus and has not always been sufficiently explained by courts or by the agency itself, resulting in uncertainty for employers.

With its new rule, the DOL intends to "sharpen this inquiry" into the following five distinct factors, rather than the overlapping factors used by most courts and by the DOL previously:

  1. The nature and degree of the individual's control over the work;
  2. The individual's opportunity for profit or loss;
  3. The amount of skill required for the work;
  4. The degree of permanence of the working relationship between the individual and the potential employer; and
  5. Whether the work is part of an integrated unit of production.

The first two factors will be considered "core factors" and given greater weight than the other three.

Also, the actual practice of the parties involved will be considered more relevant than what may be contractually or theoretically possible. For example, if a contract gives a business the authority to supervise or discipline a worker, but the business never actually exercises that authority, it will not weigh heavily against determining that the worker is an independent contractor.