How the DOL’s Withdrawal of the Independent Contractor Status Final Rule May Affect Your Association

By Elizabeth M. Roberson & Kate E. Trinkle
Krieg DeVault LLP


On March 11, 2021, the U.S. Department of Labor (DOL) announced its proposed withdrawal of its previous rule[1] for evaluating an individual’s independent contractor status (“Final Rule”). The Final Rule was officially withdrawn as explained in the Federal Register on May 6, 2021.[2] The DOL’s stated reasoning for issuing the withdrawal is because the Final Rule would “significantly weaken protections afforded to American workers under the Fair Labor Standards Act [(FLSA)].” For employers, including not-for-profit organizations, the withdrawal creates uncertainty for classifying an independent contractor and the factors that the DOL or a court will evaluate to determine whether the classification is appropriate.

Classifying Independent Contractors Before the Final Rule

Before the Final Rule was issued, independent contractor status was determined based on the FLSA’s “economic realities test,”[3] which evaluates an individual’s work circumstances. Specifically, the economic realities test focuses on how dependent the worker is on the business for which he or she performs services. The factors include the following:

  • The extent to which the services rendered are an integral part of the principal’s business. 
  • The permanency of the parties’ relationship.
  • The amount of the alleged contractor’s investment in equipment or materials.
  • The nature and degree of the business’s right to control the principal.
  • The alleged contractor’s opportunity for profit and loss.
  • Whether the services rendered require a special skill and how customers learn about that skill, whether through the employer or elsewhere. 

In analyzing these factors, courts apply a balancing test to determine whether enough factors weigh in favor of one being either an independent contractor or an employee. Courts have found that some facts are immaterial to whether there is an employment relationship, which include: “the place where work is performed; the absence of a formal employment agreement; or whether an alleged independent contractor is licensed by State/local government.”[4] Further, the Supreme Court has held that the time or mode of pay does not determine employment status.

Although having factors is beneficial, there are downsides to using this method to determine who is an independent contractor and who is an employee. First, the analysis is cumbersome and usually requires the assistance of legal counsel. Second, in many situations, the facts result in a division with some of the factors weighing in favor of the worker being an independent contractor and others weighing in favor of the worker being an employee. As such, employers are often left with an unclear result, which then requires the employer to weigh the risks and benefits associated with each classification before making a final determination. Thus, many employers would benefit from a more streamlined rule, which was part of the DOL’s intent when developing the Final Rule.

The Final Rule for Independent Contractor Status

The DOL originally published its Final Rule on the test for evaluating independent contractor status on January 7, 2021, with an original effective date of March 8, 2021. The withdrawal of the Final Rule was delayed and was recently published in the Federal Register on May 6, 2021. Prior to its withdrawal, the Final Rule on the independent contractor status set forth an economic realities test containing five factors for evaluating whether an individual is appropriately classified as an independent contractor:

(i) the nature and degree of control over the work;
(ii) the worker’s opportunity for profit or loss based on initiative and investment;
(iii) the amount of skill required for the work;
(iv) the degree of permanence of the working relationship between the worker and the potential employer;
(v) whether the work is part of an integrated unit of production.

Under this test, the DOL stated that the first two factors were to be given greater weight while the final three factors served more as additional guidelines for evaluating an individual’s status. When applying the factors of the Final Rule’s new economic reality test, the more control the employer exercises over the worker the more likely the worker is an employee. The less opportunity the worker has for profit and/or loss, the more likely the worker is an employee. The greater the skill level required of the worker, the more likely the worker is an independent contractor. The more permanent the relationship, the more likely the worker is an employee. And last, the more integral the services are to the business the more likely the worker is an employee.

Reasons for the Withdrawal

The DOL has withdrawn the Final Rule and the new economic realities test because of the following:

  • the Final Rule’s “standard has never been used by any court or the [Wage and Hour Division] [WHD], and is not supported by the [FLSA’s] text or case law,” as it elevates the importance of the control and opportunity for profit and loss factors;
  • the Final Rule would not provide the clarity it intended because “neither courts nor WHD have previously applied” it; and
  • the Final Rule did not fully consider “the likely costs, transfers, and benefits that could result.” Specifically, the final rule did not consider the cost of individuals losing FLSA protection when classified as independent contractors.

The comment period on the withdrawal closed on April 12, 2021. And on May 5, 2021 the DOL indicated that the final rule withdrawing the “Independent Contractor Status Under the Fair Labor Standards Act” final rule. The withdrawal was immediately effective upon publication in the Federal Register on May 6, 2021.

What Now?

The withdrawal of the Final Rule creates uncertainty for employers, including non-profit associations, who engage independent contractors when determining if such individuals are appropriately classified. Since the Final Rule was withdrawn and the DOL has published regulations and guidance on the Final Rule, employers should operate under the old guidance in existence before the Final Rule was issued, as explained above.

If you have any questions about how the withdrawal may affect your association or the classification of your workers, please contact Kate E. Trinkle or Elizabeth M. Roberson.

Disclaimer. The contents of this article should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult with counsel concerning your situation and specific legal questions you may have.

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