DOL Finalizes New Rule on Independent Contractor Classification

06 January 2021 Labor & Employment Law Perspectives Blog
Authors: Brooke C. Bahlinger Carrie Hoffman

Following up on its release of a proposed rule issued in September 2020, the DOL finalized new regulations on classifying independent contractors that it suggests will provide clarity for employers. On January 6, 2021, the DOL announced the Final Rule, which will take effect on March 8, 2021 (60 days after publication).

At the outset, the Final Rule addresses comments that it had received in response to the publication of the proposed rule, specifically noting that many Uber drivers were supportive overall, and some commentators stated that there was no need for a Rule at all. The DOL pointed to the inconsistencies and confusion in past applications of the economic realities test as a reason why the Final Rule was necessary.

The Final Rule looks similar to the proposed rule published in September 2020. The Final Rule:

  • Adopts an “economic realities” test to determine a worker’s status and provides clarification on the concept of economic dependence, the “touchstone” of the economic reality test; and
  • Describes the five factors involved in the “economic realities” test:
    • The nature and degree of the individual’s control over the work;
    • The opportunity for profit or loss;
    • Skill required for the work;
    • Permanence of the working relationship; and
    • Whether the work is part of an integrated unit of production.
  • Emphasizes that there are two “core” factors: the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss, which are given substantial weight in classifying workers.

The Final Rule also contains a provision that advises employers (and employees alike) that actual practice is more relevant to the correct classification than what employers or employees may like to assert through contracts, etc. Further, at the request of commentators and in the DOL’s attempt to provide even more clarity, the Final Rule includes six illustrative examples that involve application of the economic realities test across different industries and fact scenarios. The examples included the following:

  • The control factor in the long-haul transportation industry;
  • The opportunity factor in the context of the gig economy;
  • The opportunity factor in the construction industry, and further clarifies the concept of economic dependence;
  • The permanence factor in the seasonal hospitality industry; and,
  • The integrated unit factor in the context of the journalism industry.

Although the Final Rule promises clarity that employers have wanted, employers should be mindful of the administration change that may bring about more changes and/or rescind the Final Rule in general. The Final Rule becomes effective on March 8, 2021 – until then, the Final Rule may be subject to postponement, amendment, etc. because the Biden Administration (as many administrations have done in the past) has the ability to postpone the effective dates of final rules and/or rescind them entirely.  In fact, Jen Psaki, Biden’s choice for press secretary, cited the rule as one that would be impacted by a memo to block outgoing actions taken by the outgoing administration that are not yet official.

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