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Federal Court Decision Protects Independent Contractor Status

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On March 14, 2022, the U.S. District Court for the Eastern District of Texas delivered a victory for businesses that utilize independent contractors, and for independent contractors themselves, when it held that the Department of Labor's (DOL) 2021 delay and ultimate withdrawal of regulations governing independent contractor status under the Fair Labor Standards Act (FLSA) (the "IC Rule") was unlawful.

Form 1099 Miscellaneous Income
Form 1099 Miscellaneous Income

In a 41-page opinion (pdf), the court found that the DOL violated the Administrative Procedure Act (APA) twice: first, in February 2021, when it delayed the effective date of the IC Rule, and later, in May 2021, when it withdrew the IC Rule in its entirety.

Promulgated in January 2021, the IC Rule (more) clarified the relevant factors that the DOL would use to determine whether workers are in business for themselves and are independent contractors, or are economically dependent on a putative employer for work and thus employees under the FLSA. The IC Rule emphasized that the proper analysis is whether a worker is dependent on a purported employer for work as opposed to whether a worker is dependent on the income received.

Prior to adopting the IC Rule, the DOL and most courts considered seven economic reality factors when analyzing a work relationship using the economic reality test. The IC Rule clarified these seven factors by identifying two core factors based on an exhaustive analysis of decades of cases dealing with the test: (1) the nature and degree of control over the work; and (2) the worker's opportunity for profit or loss. It additionally set forth three additional non-exhaustive guidepost factors to be considered if the core factors are not determinative or point in different directions:

  • The amount of specialized training or skill required for the work that the potential employer does not provide;
  • The degree of permanence of the working relationship, focusing on the continuity and duration of the relationship and weighing toward independent contractor status if the relationship is definite in duration or sporadic; and
  • Whether the work performed is "part of an integrated unit of production."

Shortly after the 2021 Inauguration, the Department proposed a rule purporting to delay the effective date of the IC Rule, which was originally scheduled to go into effect on March 8, 2021, to May 7, 2021. On May 6, 2021 — the day before its delayed effective date — the Department issued a final rule withdrawing the IC Rule in its entirety, leaving businesses and stakeholders with little clarity as to how they might lawfully engage workers and other businesses as independent contractors.

The court's decision found that both of these actions were unlawful and violated the APA. Accordingly, the court vacated the delay and withdrawal of the IC Rule, and specifically held that the IC Rule became effective on March 8, 2021, and remains in effect today.

The decision brings welcome clarity to businesses and others seeking guidance and transparency as to how the DOL would analyze the question of whether a given worker was an independent contractor or an "employee" under the FLSA (thus entitled to, among other things, minimum wage and overtime).

It is unclear whether the Department will appeal this decision, as well as whether it will engage in new rulemaking to propose a new independent contractor standard.

Posted In: Department of Labor (DOL); Fair Labor Standards Act (FLSA)

Want to know more? Read the full article by at Littler Mendelson

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