Labor, Employment and Immigration Update

U.S. Department of Labor Returns to Traditional Economic Realities Test; Trump-Era Rule on Independent Contractors Is Trumped

May 27, 2021

Trump-Era Rule

Employers may recall that on January 6, 2021, just weeks before President Joe Biden took office, the DOL issued a new rule regarding the classification of workers as independent contractors or employees under the Fair Labor Standards Act (FLSA). The rule provided a five-factor revised “economic reality” test, with two “core factors”: (i) the nature and degree of the worker’s control over the work and (ii) the worker’s opportunity for profit or loss. The rule was aimed at providing more consistency and clarity for employers evaluating proper classification of workers.

The withdrawal of the rule was anticipated, as the Biden-administered DOL initially delayed the effective date and announced its intention to withdraw the rule in March 2021.

The Biden administration also withdrew an April 2019 DOL opinion letter that was the genesis of the Trump-era rule; this opinion letter approved independent contractor status for workers who used an app-based tech company’s app to connect with customers to provide services such as cleaning, transportation, and plumbing.

Return to “Traditional” Economic Realities

Because the DOL has not yet replaced the former rule with a new interpretation, the traditional economic realities test established by judicial precedent will return as the governing standard. As a reminder, this multifactor test consists of an evaluation of the following factors under the totality of circumstances:

the extent to which the services rendered are an integral part of the business
the permanency of the worker’s relationship to the company
the worker’s and employer’s investment in items such as equipment
the nature and degree of control by the company
the worker’s opportunity for profit and loss
whether the work requires special skills and initiative

However, this standard too may be changing again soon. President Biden campaigned on the implementation of a three-prong “ABC” test in his Empower Workers plan and recently emphasized his support for the Protecting the Right to Organize Act of 2021, which includes the ABC test. The ABC test, adopted by certain jurisdictions including California and Massachusetts, states that a worker is an independent contractor only if the individual meets the following criteria: (1) The worker is free from the control and direction of the hiring entity in connection with the work’s performance, both under the contract for the performance of the work and in fact; (2) the worker performs work that is outside the usual course of the hiring entity’s business; and (3) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

What This Means for Employers

With the rules for classification in flux on both a federal and a state level, employers are encouraged to work with counsel to carefully analyze workers to ensure proper classification and take corrective action where needed. Employers should also pay close attention to any new regulations issued in applicable states or by the Biden administration to assure that their contractors meet the correct standard under any newly promulgated laws.

The Sidley Employment Team is available to provide specific, timely guidance.

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