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    Labor Department Reverses on Rule Treating Gig Workers as Independent Contractors

    The U.S. Department of Labor (DOL) has withdrawn a rule put in place by the Trump Administration that would have treated workers in the gig economy as independent contractors instead of employees under federal labor law. In early 2021, under the Trump administration, the DOL announced a final rule “clarifying” the standard for employee versus independent contractor under the Fair Labor Standards Act (FLSA). The rule determined that gig workers–those who do short-term work for multiple clients like Uber and Lyft drivers—would be liable for their own payroll taxes and would not be protected by federal minimum wage and overtime requirements. The rule had an effective date of March 8, 2021.

    Now, the DOL under President Biden has withdrawn the rule, stating, “The Department believes that the Rule is inconsistent with the FLSA’s text and purpose, and would have a confusing and disruptive effect on workers and businesses alike due to its departure from longstanding judicial precedent.” The DOL first published a proposed rule to withdraw the earlier final rule and asked for comments. After receiving over 1000 comments, the DOL published its final withdrawal on May 6, 2021.

    Numerous state officials, members of Congress, labor unions, social justice organizations, worker advocacy groups and individual commenters wrote in support of the DOL’s proposed withdrawal while companies, trade associations, business advocacy organizations, law firms and individual commenters submitted comments opposing the withdrawal of independent contractor rule. Clearly, public opinion is split on this issue.

    Reasons for Withdrawal

    The DOL gave several reasons for withdrawing the rule:

    • The rule’s standard has never been used by any court or by the DOL Wage and Hour Division and is not supported by the FLSA’s text or purpose or judicial precedent.
    • The rule’s emphasis on control and its recasting of other factors typically considered by courts would improperly narrow the facts to be considered in the application of the economic realities test, which looks at the nature of the relationship of the employer and worker.
    • The rule’s “novel guidance” would cause confusion or lead to inconsistent outcomes rather than provide clarity or certainty and fails to take into account the costs for affected workers who might no longer receive the wage and hour protections as independent contractors.
    • Withdrawing the independent contractor rule would not be disruptive because it had not yet taken effect.

    Effect of DOL’s Action

    With the withdrawal of the rule, the standard methods of determining whether a worker is an employee or an independent contractor will continue. Both courts and the IRS look to the economic realities of the relationship to determine whether the worker is dependent on the employer for work or is in business for him or herself, considering factors such as:

    (1) The degree of the employer’s right to control the manner in which the work is to be performed;

    (2) the worker’s opportunity for profit or loss depending upon his or her managerial skill;

    (3) the worker’s investment in equipment or materials required for his or her task, or employment of helpers;

    (4) whether the service rendered requires a special skill;

    (5) the degree of permanence of the working relationship;

    (6) whether the service rendered is an integral part of the employer’s business.

    No one factor is conclusive, but all factors need to be considered together.

    The Trump Administration rule, rushed through after his election loss, would have for the most part settled the issue of worker classification for gig workers and given companies a shield against class action lawsuits by workers. The Biden Administration’s rollback of the rule signals that the DOL and IRS do not accept a blanket rule for classifying gig workers and will continue to scrutinize worker classification on a case-by-case basis in the new economy.

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