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DOL Set to Withdraw Independent Contractor Rule

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What You Need to Know

  • The withdrawal becomes effective Thursday.
  • The Financial Services Institute supported Labor’s Independent Contractor Rule.
  • Labor says the rule would have eroded worker protections.

The Labor Department on Wednesday said it would withdraw effective Thursday its Independent Contractor Rule in order to maintain workers’ rights to the minimum wage and overtime compensation protections of the Fair Labor Standards Act.

The rule clarified the standard for employee versus independent contractor under the Fair Labor Standards Act, and reaffirmed an “economic reality” test to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).

The Financial Services Institute, an advocacy group for independent financial advisors, supported the rule and said it was “disappointed” by its withdrawal.

Labor said it is withdrawing the rule for several reasons, including:

  • The independent contractor rule was in tension with the FLSA’s text and purpose, as well as relevant judicial precedent.
  • The rule’s prioritization of two “core factors” for determining employee status under the FLSA would have undermined the longstanding balancing approach of the economic realities test and court decisions requiring a review of the totality of the circumstances related to the employment relationship.
  • The rule would have narrowed the facts and considerations comprising the analysis of whether a worker is an employee or an independent contractor, resulting in workers losing FLSA protections.

“By withdrawing the Independent Contractor Rule, we will help preserve essential worker rights and stop the erosion of worker protections that would have occurred had the rule gone into effect,” Labor Secretary Marty Walsh said in a statement.

“Legitimate business owners play an important role in our economy but, too often, workers lose important wage and related protections when employers misclassify them as independent contractors,” Walsh stated. “We remain committed to ensuring that employees are recognized clearly and correctly when they are, in fact, employees so that they receive the protections the Fair Labor Standards Act provides.”

The FLSA, as Labor explains, “includes provisions that require covered employers to pay employees at least the federal minimum wage for every hour they work and overtime compensation at not less than one-and-one-half times their regular rate of pay for every hour they work over 40 in a workweek.”

FLSA protections do not apply to independent contractors.

Labor also said that in addition to maintaining the scope of workers covered by FLSA wage and hour protections, the department “anticipates that the independent contractor rule’s withdrawal will avoid a reduction in workers’ access to employer-provided fringe benefits such as health insurance and retirement plans.”

The withdrawal, Labor said, “will also avoid a reduction in other benefits such as unemployment insurance and workers compensation coverage.”

FSI Position

The Financial Services Institute opposes the rule’s withdrawal.

“We are disappointed in DOL’s decision to withdraw its independent contractor rule,” FSI President and CEO Dale Brown said Wednesday in a statement. “The rule provided much-needed clarity and certainty for independent financial advisors, independent financial services firms and their clients.”

FSI stated in an April 12 comment letter to Labor that its final rule “adopts the long standing ‘economic reality test’ to determine whether workers are employees or independent contractors under the FLSA. It also clarifies that independent contractors are workers who, as a matter of economic reality, are in business for themselves as opposed to being economically dependent on a potential employer for work.”

FSI stated that it supported DOL’s efforts “to bring clarity and consistency to the determination of who is an independent contractor under the FLSA and believe, for that reason, that it is imperative” that the final rule should not be withdrawn.

FSI’s financial advisor members “are independent business owners operating as independent contractors who enjoy the freedom of running their own practice and offering their clients comprehensive advice, products and services,” FSI told Labor.