Federal court reinstates previous independent contractor rule – a win for employers (for now)

Posted March 23, 2022

On March 14, 2022, a federal judge in the U.S. District Court for the Eastern District of Texas reinstated the previous independent contractor rule under the Fair Labor Standards Act (FLSA).

This means that under federal law, employers should generally follow these federal independent contractor standards to determine if a worker is an independent contractor or an employee:

• Economic reality test. To determine whether workers are in business for themselves or are economically dependent on an employer for work.
• Core factors. Two “core factors” including:
  • The nature and degree of control over the work.
  • The worker’s opportunity for profit or loss based on initiative and/or investment.
• Additional guidance. Three other factors act as additional guidance, particularly when the two core factors do not point to the same classification. The factors are:
  • The amount of skill required for the work.
  • The degree of permanence of the working relationship between the worker and the potential employer.
  • Whether the work is part of an integrated unit of production.

Why did the court reinstate the previous rule?

The court found that the U.S. Department of Labor (DOL) failed to consider potential alternatives to rescinding the independent contractor rule, and that the public wasn’t given enough time to provide their comments, therefore, violating the Administrative Procedure Act (APA).

The notice-and-comment period was only 19 days. The judge said, “Although the APA does not mandate the minimum number of days necessary for adequate comment, circumstances warranting a comment period of less than 30 days are rare and generally require good cause.”

Initially, the previous administration’s independent contractor rule was going to take effect in March 2021, but it was delayed. In May 2021, however, the DOL withdrew the rule altogether. Then the lawsuits began.

FLSA: Employee vs. independent contractor

A worker’s classification as an employee or an independent contractor makes a significant difference when it comes to their rights under the FSLA.

The FLSA includes provisions that require covered employers to pay employees at least the federal minimum wage for every hour worked and overtime pay at not less than one-and-one-half times their regular rate of pay for every hour over 40 in a workweek. FLSA protections do not apply to independent contractors.

Posting change?

The Employee Rights Under the Fair Labor Standards Act poster, which must be posted by all employers, contains information about independent contractors. Reinstating this rule will not impact the poster, however.

The poster notes that workers are sometimes incorrectly classified as independent contractors when they are really employees, and it is important to know the difference between the two classifications.

The poster also notes that employees are entitled to minimum wage and overtime pay protections, while independent contractors are not. This information remains accurate, so the FLSA poster will not be updated due to this change.

This article was written by Michelle Higgins of J. J. Keller & Associates, Inc.