The U.S. Department of Labor (DOL) announced that it has withdrawn the "independent contractor rule" to maintain workers' rights to the minimum wage and overtime compensation protections under the Fair Labor Standards Act (FLSA). The rule was enacted by the department under the Trump administration and would have generally considered "gig economy" and certain other workers as independent contractors for purposes of federal labor law.
In September 2020, the DOL issued proposed regulations that would have provided an "economic reality" test to determine a worker's status as an FLSA employee or an independent contractor. The test would have identified two "core factors" (the nature and degree of the worker's control over the work, and the worker's opportunity for profit or loss based on initiative and/or investment) and three other factors for guidance in making a worker classification determination.
The DOL received nearly 1,800 comments on the proposed rule before the comment period closed. Some organizations applauded the proposed rule for its flexibility in work arrangements. Others voiced opposition, citing concerns that the rule would misclassify workers as independent contractors who are not protected under the FLSA.
The DOL posted the final "independent contractor rule" in early-January 2021 when President Trump was still in office. It was similar to the proposed rule and used an "economic reality" test for guidance in classifying workers. The rule was scheduled to take effect on March 8, 2021.
However, in February 2021 after the Biden administration took over, the DOL proposed that the independent contractor rule effective date would be delayed until May 7, 2021. Then, in early-March 2021, the DOL announced a final rule that delayed the effective date of this rule until May 7, 2021. The DOL noted that the proposed delay received 1,512 comments in support of the delay.
On March 26, 2021, a complaint was filed by the Coalition for Workforce Innovation, Associated Builders and Contractors of Southeast Texas, and Associated Builders and Contractors Inc. It argued that the effective date delay was "arbitrary, capricious, and contrary to procedures required by law." The plaintiffs allege that the DOL failed to provide a meaningful comment period before finalizing the delay and did not offer "substantive justification" for the delay.
Finally, on May 5, 2021, the DOL announced it was withdrawing the independent contractor rule on May 6, 2021, one day before the delayed effective date was to take place. The agency listed the following reasons for the withdrawal:
The DOL added that the rule's withdrawal will also avoid a reduction in workers' access to employer-provided fringe benefits such as health insurance and retirement plans. In addition, the DOL believes the withdrawal will avoid a reduction in other benefits such as unemployment insurance and workers compensation coverage.
If you need assistance in classifying workers to stay in compliance with various laws, including tax laws, consult with your tax and human resource advisors.
"Legitimate business owners play an important role in our economy but, too often, workers lose important wage and related protections when employers misclassify them as independent contractors. We remain committed to ensuring that employees are recognized clearly and correctly when they are, in fact, employees so that they receive the protections the Fair Labor Standards Act provides."
— U.S. Secretary of Labor
"We are disappointed to see the administration withdraw a balanced rule that was well-grounded in the law and provided certainty to workers and businesses about worker classification. We hope that the administration does not pursue new regulations that would limit earning opportunities for independent workers and small businesses. Such policies will slow economic growth, job creation, and earnings as we emerge from the pandemic."
— U.S. Chamber of Commerce
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