Department of Labor Proposes to Withdraw Trump Administration Worker-Classification Rule

March 17, 2021
On March 12, 2021, the U.S. Department of Labor (the “Department”) published a notice of proposed rulemaking to withdraw the Trump administration’s final rule (the “Rule”) for classifying workers as employees or independent contractors under the Fair Labor Standards Act (the “FLSA” or the “Act”). The Rule had been published but had not yet gone into effect. We previously discussed the Rule here. Had it gone into effect, the Rule would have established a new worker-classification test focusing on two “core factors”: (1) “the nature and degree of control over the work”; and (2) “the individual’s opportunity for profit or loss.” The definition of “employee” is significant because the FLSA’s minimum wage and overtime requirements apply only to nonexempt employees.
The Rule would have been the first agency rule to define the term “employee” under the FLSA. Since the Act was passed in 1938, courts have developed a multifactor “economic reality” test for classifying workers as employees or independent contractors. In 2015, the Department issued an Administrative Interpretation (the “Guidance”) providing the Department’s views on six factors that courts typically use when applying the economic reality test. We previously discussed the Guidance here. The Trump administration’s Rule, which created a new version of the economic reality test that focuses on two “core factors,” was issued on January 7, 2021, thirteen days before the end of former President Trump’s term. After his inauguration on January 20, President Biden issued a memorandum directing department and agency heads to impose a “regulatory freeze” on Trump-era rules that had not yet taken effect. At the time, the Rule was scheduled to take effect on March 8, 2021. On March 4, the Department delayed the Rule’s effective date to May 7.
Explaining its proposal to withdraw the Rule, the Department argued that the Rule’s selection of two core factors, which are usually dispositive when they both point toward the same classification, “may be inconsistent with the position, expressed by the Supreme Court and federal courts of appeals, that no single factor in the analysis is dispositive.” The Department stated that “there is no clear statutory basis for such a predetermined weighting of the factors,” that worker classification depends on “economic reality” rather than “technical concepts,” and that courts have looked to the “totality of the circumstances” to determine whether workers are employees or independent contractors. The Department also argued that, in elevating “control” as one of two “core factors” that carry more weight than the other factors, the Rule undermines the statutory intent for the “employee” classification to cover a broader range of workers than those who would be covered under the common law control test. As to the other factors, the Department stated that it “proposes to withdraw the Rule in part because it eliminates from the economic realities test several facts and circumstances that have deep roots in both the courts’ and the [Wage and Hour Division’s] application of the analysis.” Finally, the Department stated that it is “concerned, as a policy matter, that the Rule’s narrowing of the analysis would result in more workers being classified as independent contractors not entitled to the FLSA’s protections.”
The notice of proposed rulemaking states that withdrawal of the Rule “would allow [the Wage and Hour Division] an additional opportunity to consider legal and policy issues relating to the FLSA and independent contractors.” However, the notice also states that the Department “is not proposing any regulatory guidance to replace the guidance that the Independent Contractor Rule would have introduced as Part 795.” Candidate Biden promised to establish “a [worker-classification] standard modeled on the ABC test,” which deems workers to be employees unless they satisfy each of three elements (the “ABCs”), for “all labor, employment, and tax laws.” But Biden’s campaign website states that he will establish such a standard by “work[ing] with Congress.” The website does not mention administrative rulemaking as a potential mechanism for enacting the ABC test. Additionally, several of the notice’s reasons for withdrawing the Rule—for example, that “the Rule’s approach is inconsistent with the court-mandated totality-of-the-circumstances approach to determining whether a worker is an employee or an independent contractor”—suggest that the Department is disinclined to replace the multifactor economic realities test with the three-element ABC test through administrative rulemaking. Notably, on March 9, 2021, the House of Representatives passed the Protecting the Right to Organize Act, which imports the ABC test into the National Labor Relations Act. That bill is now before the Senate, but the provision enacting the ABC test does not affect the Fair Labor Standards Act.
Public comments on the Department’s proposal to withdraw the Rule are due by April 12.