DOL Withdraws FLSA Independent Contractor Rule

The DOL has withdrawn regulations on determining whether a worker is an independent contractor for purposes of the Fair Labor Standards Act (FLSA), referred to as the “independent contractor rule.” The rule was issued in final form in January 2021 with a March 8, 2021 effective date, but was almost immediately subject to a regulatory freeze (see our Checkpoint article), and then delayed to May 7, 2021 (see our Checkpoint article). The withdrawal is effective May 6, 2021.

Highlighting reasons for the withdrawal, the DOL explains that the rule would have narrowed the considerations factoring into the analysis of independent contractor or employee status, and the balancing approach of the “economic realities test,” developed over decades of case law, would have been undermined by the rule’s emphasis on two “core factors” (the nature and degree of a worker’s control over the work, and the worker’s opportunity for profit or loss based on the worker’s initiative, investment, or both). Responding to some commenters’ assertions that focusing on these two factors implicitly adopts a common-law employee standard, the DOL notes the FLSA’s express rejection of that standard to determine whether a worker is an employee. The DOL expresses concern for workers who, as a result of the rule, might no longer receive the FLSA’s wage and hour protections due to treatment as independent contractors, and also points out that independent contractors have reduced access to employer-provided benefits such as health coverage or retirement plans. The DOL anticipates that the rule’s withdrawal will avoid reductions in workers’ access to benefits that might have occurred had the rule taken effect.

EBIA Comment: The DOL cited statistics showing that independent contractors have less access to employer-provided benefits than employees. Still, the DOL’s attention to benefits is interesting, given that classification as an employee or independent contractor under the FLSA does not typically apply for employee benefits purposes. Instead, most employee benefit plan rules determine employee status under ERISA or the Code, often in conjunction with the common-law standard. Employers must be careful to apply the correct standard when determining an individual’s status for a specific purpose. Improper classification can be particularly problematic under Code rules applicable to retirement plans, cafeteria plans, and employer shared responsibility penalties. For more information, see EBIA’s Health Care Reform manual at Sections XXI.E.3.a (“Exchange Notice: Who Is an Employee for FLSA Purposes?”) and XXVIII.C (“Penalty Tax Hinges on Whether Employer Offers Coverage to Full-Time Employees”). See also EBIA’s ERISA Compliance manual at Section IX.I (“Eligibility Issues Involving Independent Contractors, Leased Employees, and Others”); EBIA’s Cafeteria Plans manual at Section IX (“Who Can Participate in a Cafeteria Plan?”); EBIA’s Self-Insured Health Plans manual at Section XIV.C (“Which Employees and Other Workers Will Be Allowed to Participate?”); and EBIA’s 401(k) Plans manual at Section VII.B (“Eligibility Condition #1: Participation Limited to Common-Law Employees, Partners and Sole Proprietors, Some Leased and Statutory Employees”).

Contributing Editors: EBIA Staff.