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Department of Labor Withdraws New Independent Contractor Rule

The Department of Labor (DOL) originally issued a new rule on January 6th, 2021 that clarified the standard for classifying employees as independent contractors under the Fair Labor Standards Act (FLSA). However, the DOL delayed the implementation of the new rule due to a regulatory freeze issued by the White House shortly after.

The regulatory freeze postpones any rulings that have been issued but have not yet taken effect. Then on May 7th, 2021, the DOL announced the new rule had been permanently withdrawn due to an existing conflict with the FLSA. The DOL explained that the conflict included the following:

  • The independent contractor rule’s prioritization of two core factors for determining and 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.
  • The new rule would have also narrowed the facts and considerations comprising the analysis of whether a worker was an employee or an independent contractor. This would result in workers losing FLSA protections.

Additionally, the DOL argued that withdrawing the rule would help avoid a reduction in worker’s access to employer-provided fringe benefits like health insurance and retirement plans.

The new rule was designed to clarify standards for classifying individuals as either independent contractors (1099) or standard employees (W-2), by using the four following measures as guidelines:

Economic Realities Test– The test was designed to determine if an individual was economically independent (contractor) or dependent on an employer (standard employee.) The test includes the following five factors:

  • Core Factors– Two core factors were emphasized to help determine classification. They include the nature and degree of the worker’s control over their own work, vs. The employer controlling their work (schedule, duties, etc.), along with their opportunity for loss or profit based on their own initiative and effort.
  • Three Additional Factors– If the core factors were not enough to determine the proper classification, three additional factors were established that included the amount of skill required for the job, the degree of permanence in the position, and if the work in question was part of an integrated unit of production.

Actual Practice Relevance– Ultimately, actual practice is more relevant and should be weighed heavier than what is contractually or theoretically possible.

Under the FSLA, the difference between being classified as a traditional employee or an independent contractor is both vital and varied. There are legal requirements and responsibilities that employers must meet when hiring a traditional employee vs. an independent contractor.

The DOL, however, has not stated whether they will be offering a new rule in replacement. It will continue to enforce the totality of the circumstances economic realities test it has traditionally used in determining the status of a worker.

Is there anything Payroll Systems can help you with as you accommodate rapid legislation changes? Reach out and talk to us about the easy-to-scale solutions you need for your business.

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This article provides general information and shouldn’t be construed as legal or HR advice. Since employment laws may change over time and can vary by location and industry, please consult a lawyer or HR expert for advice specific to your business. You can also contact Payroll Systems to inquire about our HR support services.