Labor Department Withdraws Independent Contractor Rule

On May 5th, 2021, the U.S. Wage and Hour Division (WHD) announced the withdrawal of the impending  Independent Contractor Rule. Namely, the final rule clarified the standard for employee versus independent contractor status under the Fair Labor Standards Act (FLSA). On March 4th, 2021, the Department of Labor (DOL) issued guidance on postponing the effective date until May 7th, 2021. Additionally, the WHD sought comments on rescinding in totality the Independent Contractor Rule before the May 7 effective date.

Background of the FLSA

Signed into United States law in 1938, the FLSA created the right for employees to earn a minimum wage. Additionally, the FLSA requires employees to earn time-and-a-half overtime pay when working over 40 hours a week. The law also prohibits the employment of minors in “oppressive child labor” situations. According to the law, the FLSA applies to employees who are:

• engaged in interstate commerce;
• involved in the production of goods for commerce; or
• employed by an enterprise engaged in commerce or the production of goods for commerce.

Since its inception in 1938, the FLSA has seen multiple additions and updates. For example, in May 2021, the U.S. Department of Labor (DOL) issued a final rule on tip regulations. Portions of the tip rule went into effect on April 30th, 2021.

Rescinding the Rule

The WHD has released multiple reasons why it is withdrawing the rule. Those reasons include that the Independent Contractor Rule was:

• Interfering with the FLSA’s text and purpose and previous relevant judicial precedent.
• Prioritizing two “core factors” for determining employee status under the FLSA. As a result, this practice would have undermined the longstanding balancing approach of the economic realities test. Earlier court decisions that reviewed all circumstances related to the employment relationship would also be made obsolete.
• Narrowing the facts and considerations that analyzed whether a worker is an employee or an independent contractor. Consequently, that analysis could result in workers losing FLSA protections.

Employer Takeaways

In conclusion, with the removal of the Independent Contractor Rule, employers can breathe a sigh of relief. The final rule was initially published in the Federal Register on January 7, with the effective date of March 8. Since the Biden Administration took office, it delayed the original effective date to gather employer input on the possible change. Now that the rule will no longer become law, employers should continue to follow worker status regulations currently included in the FLSA. Any changes to policies or procedures reflecting the possible update no longer need to be considered.