DOL Withdraws the Proposed Independent Contractor Rule

June 21, 2021

In October I wrote about the new “Independent Contractor Rule” (or “Final Rule”) proposed by the Trump administration, and I provided an update in February. (See the posts below dated October 14, 2020, and February 24, 2021.) The Final Rule would have become effective on March 8, 2021. On May 6, 2021, however, the U.S. Department of Labor formally withdrew the rule.

The Final Rule clarified the factors the DOL would use to determine whether workers are employees or independent contractors for purposes of the Fair Labor Standards Act. As many employers have learned the hard way, misclassifying a worker as an independent contractor is a costly mistake. A rule that clarifies the distinction would be a big help to employers.

In February 2021, the Biden administration proposed delaying implementation of many regulations issued near the end of the Trump administration, including the Independent Contractor Rule. In March, the DOL delayed the effective date of the Final Rule to May 7, 2021. The DOL subsequently proposed withdrawing the rule entirely and formally withdrew the Final Rule on May 6, 2021. The DOL’s actions in delaying and ultimately withdrawing the Independent Contractor Rule are currently being challenged in the U.S. District Court for the Eastern District of Texas. The plaintiffs argue that the DOL acted arbitrarily and in violation of federal regulatory procedures.

If the Biden administration’s actions are upheld by the court, there will continue to be uncertainty as to whether some workers can be properly classified as independent contractors under the Fair Labor Standards Act. Over the years, courts have fashioned various tests for making that determination, which makes it difficult to predict the outcome with any certainty or consistency.

The U. S. Department of Labor and the Colorado Department of Labor and Employment conduct audits to determine whether an employer has misclassified workers as independent contractors. These audits can be triggered by an independent contractor filing a workers’ compensation claim or a claim for unemployment benefits, or by a complaint filed by a worker who alleges the employer has misclassified some of its workers. The audit can also be initiated by the DOL or CDLE as a part of an enforcement effort directed at specific industries.

With the withdrawal of the Final Rule, it would not be surprising to see these agencies become even more aggressive in their efforts to audit employers on this issue, which might include taking an even narrower view of who qualifies as an independent contractor. In fact, the U. S. Secretary of Labor, Marty Walsh, has said that “in a lot of cases” gig workers should be classified as employees rather than independent contractors. It is not clear whether or how the Biden administration might make that policy preference a reality. Nevertheless, the Secretary’s comments suggest that employers who use independent contractors (gig workers or not) should take steps to ensure those workers are correctly classified.