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U.S. Labor Department Issues ‘Midnight' Rule on Independent Contractors

    Client Alerts
  • January 07, 2021

On January 7, the U.S. Department of Labor published a new final rule adopting a five-factor test for determining whether a worker qualifies as an independent contractor under the Fair Labor Standards Act. The rule is set to take effect on March 8, 60 days after publication. However, the incoming Biden administration has forecasted its intent to issue a memorandum freezing “midnight” regulations issued by the outgoing administration that have yet to take effect. In all likelihood, this new employer-friendly rule may be short-lived. 

The distinction between “employees” and “independent contractors” carries critical importance to businesses because independent contractors are exempt from the FLSA’s minimum wage and overtime provisions. The DOL explained that it adopted this new rule in order to provide clarity and uniformity not provided by existing precedent from the courts and guidance from DOL.

The new rule states that “[a]n individual is an independent contractor … if the individual is, as a matter of economic reality, in business for him-or herself.”  The rule then lays out five factors to make that determination:

  1. The nature and degree of control over the work.
  2. The individual’s opportunity for profit or loss.
  3. The amount of skill required for the work.
  4. The degree of permanence of the working relationship between the individual and the potential employer.
  5. Whether the work is part of an integrated unit of production.

While none of the factors are dispositive, the rule explains that the first two factors are the most important and “if they both point towards the same classification … there is a substantial likelihood that is the individual’s accurate classification.” 

The rule certainly distills the existing tests used by various courts into a more succinct and potentially uniform analysis. The rule also provides helpful examples of how the test would apply using relevant situations faced by modern employers, such as the owner of a tractor-trailer, an individual who accepts assignments from an app-based service, and a part-time newspaper editor. Nevertheless, the proposed rule has been the subject of criticism, including by a group of 23 senators who argued, among other things, that the proposal did not adequately address the types of control that businesses can assert over workers, and that it allows businesses to convert employees to independent contractors by requiring them to purchase their own equipment.