Recent action taken by the U.S. Department of Labor (DOL) will make it more difficult for businesses to classify workers as independent contractors rather than employees. The DOL announced the withdrawal of the Trump-era Independent Contractor Rule as it moves to ensure compliance with minimum wage and overtime compensation regulations.
According to the DOL’s announcement, the Independent Contractor Rule—as instituted by the Trump administration on January 6, 2021—would have been inconsistent with the purpose of the Fair Labor Standards Act (FLSA). As a result, the rule was rescinded, and no changes to the current state of independent contractor classifications are anticipated in the coming months.
So what is the importance of this recent update—and how will it impact businesses moving forward? Broadleaf’s legal team weighs in:
Trump administration’s rule change
During the waning months of the Trump administration, the DOL fast-tracked a newly endorsed independent contractor evaluation test that examined workers based on two factors. According to the National Law Review, independent contractors were to be evaluated based on (1) the level of control the individual has over his/her work and (2) the opportunity for profit or loss due to their own personal investment. This new evaluation was supported by the greater business community, as it was easier to classify workers as ICs.
Repeal of the focused economic-realty test
While the DOL under President Biden has publicly stated that it does not plan to issue a new independent contractor rule in the coming months, it is known that President Biden supports an “ABC” test similar to the one utilized in California. In this state—along with other stringent jurisdictions like Illinois, Massachusetts, and New Jersey—the following factors must be met for a worker to be classified as an IC:
- The worker is free from the control of the hiring entity in connection with the performance of the work;
- The worker performs tasks that are outside the usual course of the hiring entity’s business; and
- The worker is routinely engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
Impact of re-establishing the status quo
The decision by the DOL to repeal the Trump administration’s Independent Contractor Rule affirms their position that protecting worker rights is a top priority. Rather than continuing to face looming uncertainty about how the Biden administration would handle the rule, the administration’s action reaffirms the status quo that existed prior to January 2021 in relation to independent contractors.
The impact on businesses? The primary impact of this recent DOL decision lies in increased labor costs for businesses. While FLSA minimum wage and overtime laws do not cover independent contractors, they do apply to all employees. Additionally, employers offer benefits like paid time off and health insurance to direct employees, which add to labor costs. It will also prove more challenging for businesses to terminate employment with a direct employee versus an independent contractor, so there is less flexibility in scaling your workforce.
The impact on independent contractors? Workers who prefer to be freelancers and ICs will lose the advantages of claiming IC status, which include more flexible work schedules, greater control over their work product, tax benefits for business expenses, and oftentimes higher compensation to atone for not receiving employee benefits.
Although businesses may have financial and business reasons to classify workers as independent contractors—and an increasing number of workers also prefer to work as freelancers—the DOL’s new stance will make it challenging to do so. The Biden administration has pledged to stand behind workers and support the provision of benefits. Additionally, many states have IC tests more restrictive than and essentially superseding the FLSA’s requirements. Moving forward, look for more states to implement employee-friendly worker classification tests similar to those found in California that create difficulties for employers to utilize the skills of independent contractors.