Independent Contractor Rule Withdrawn with Immediate Effect

File labeled contractors with documents inside

Yesterday, the Wage and Hour Division at the Labor Department announced their withdrawal of the Independent Contractor rule. A rule which was only finalized on January 7th of this year.

The changes come into effect today, May 6th, 2021.

What is the Independent Contractor Rule?

On January 7th, 2021, the Independent Contractor rule[1] was established to clarify the standards for Independent Contractors vs. employees under the Fair Labor Standards Act (FLSA). This rule meant an intense ‘economic reality’ test could be undertaken to determine whether a worker was classified as an employee or contractor under the FLSA.

The core factors of this test included:

  •  The individual’s opportunity for profit and loss based on investment or initiative
  • The degree and nature of the individual’s control over the work
  • The permanence of the relationship between the employee and employer
  • The level of skill required for the work
  • Whether the work being undertaken is part of an integrated unit of protection

In March of this year, the U.S Department of Labor announced a proposal to rescind the Independent contractor rule.[2]

Before this ruling, many states adopted the ABC test to ascertain whether an individual is classified as an employee or independent contractor. The test considers a worker to be an employee unless the following three criteria are satisfied.

  • The individual is free from the control and direction of the hiring entity
  • The individual undertakes work outside of the entity’s typical course of business.
  • The individual is customarily engaged in an independent occupation, trade, or business of the same nature as the work being performed for the hiring entity.

Why was the independent contractor rule introduced?

With the explosion in the gig economy, issues around employment classifications have been hotly contested. One of the most publicized staffing issues in 2020 unfolded during a legal battle over how Lyft and Uber drivers should be classified. There were concerns that companies would classify workers as Independent Contractors because it costs less money and serves as a lower-risk form of ‘employment’ compared to other types of hiring solutions. It also means people who are essentially (but not technically) employed by a business could miss out on the protection of a minimum wage, retirement benefits, overtime, workers compensation eligibility, and more.

Why was the Independent Contractor rule withdrawn?

Multiple reasons have been cited[3] behind the decision to withdraw the independent contractor rule.

Reason #1 The independent contractor rule was in tension with the Fair Labor Standards Act’s text and purpose and relevant judicial precedent.

Reason #2 The rule’s prioritization of two “core factors” for determining employee status under the Fair Labor Standards Act 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.

Reason #3 The rule would have narrowed the facts and considerations comprising the analysis of whether a worker is an employee or an independent contractor, resulting in workers losing FLSA protections.

Marty Walsh, the Independent Labor Secretary, states:

“By withdrawing the Independent Contractor Rule, we will help preserve essential worker rights and stop the erosion of worker protections that would have occurred had the rule gone into effect. Too often, workers lose important wage and related protections when employers misclassify them as independent contractors.”

Worker advocates believe the rule would have allowed employers to deny workers a protected minimum wage, overtime, and other benefits afforded to regular employees. However, lawyers representing those who are opposed to rescinding the rule argue that this will force employers to employers to bring on fewer workers, many of whom prefer to be freelancers in the current economy.

We are currently compiling a blog post about the new legislation that will replace the withdrawn Independent Contractor rule. It will also cover what the changes mean for contractors and hiring managers. As soon as this is published, a link will be added to this post. 

Are you a contractor? Or, do you hire independent contractors?

If so, we’d welcome your opinion on this news.


Resources and Sources

[1] https://www.dol.gov/agencies/whd/flsa/2021-independent-contractor

[2] https://www.dol.gov/newsroom/releases/whd/whd20210311

[3] https://www.federalregister.gov/documents/2021/05/06/2021-09518/independent-contractor-status-under-the-fair-labor-standards-act-flsa-withdrawal

About Pete Newsome

Pete Newsome is the president of 4 Corner Resources, the nationally acclaimed staffing and recruiting firm he founded in 2005. His mission back then was the same as it is today: to do business in a personal way, while building an organization with boundless opportunities for ingenuity and advancement. When not managing 4 Corner’s growth or spending time with his family of six, you can find Pete sharing his sales and business expertise though public speaking, writing, and as the host of the Hire Calling podcast.