Workplace Issues

U.S. Adopts New Independent Contractor Rule

"At its core, the rule makes it easier to classify workers as independent contractors rather than employees."
Matthew HellerJanuary 7, 2021

The Trump administration has approved a regulatory change to make it easier for businesses to classify workers as independent contractors rather than employees.

The rule change defines independent contractors for the first time under the Fair Labor Standards Act, adopting an “economic reality” test that focuses primarily on whether a worker is economically dependent on an employer.

“This rule brings long-needed clarity for American workers and employers,” Secretary of Labor Eugene Scalia said in a news release. “Sharpening the test to determine who is an independent contractor under the Fair Labor Standards Act makes it easier to identify employees covered by the act, while recognizing and respecting the entrepreneurial spirit of workers who choose to pursue the freedom associated with being an independent contractor.”

Under the economic reality test, the status of a worker can be determined, primarily, by looking at “the nature and degree of the worker’s control over the work” and “the worker’s opportunity for profit or loss based on initiative and/or investment.”

“It’s going to likely decrease the number of workers classified as employees, because at its core this makes it easier to classify workers as independent contractors rather than employees,” Cozen O’Connor attorney Aaron Holt told Yahoo Finance, adding that businesses could see decreased costs because they won’t have to provide contractors with benefits or equipment.

The new rule, however, doesn’t take effect until March 8 and a spokeswoman for President-elect Joe Biden has indicated that he would seek to halt or delay it with a memo he intends to sign on inauguration day.

According to The Wall Street Journal, the rule is “a victory for gig-economy companies such as food-delivery and ride-sharing services and a counter to a California law that did the opposite.”

Labor advocates contend it will make it easier for companies to misclassify workers.

“The rule gives license to employers to call most of their workers independent contractors,” said Catherine Ruckelshaus, general counsel at the National Employment Law Project. “That would dramatically narrow worker protections…in the jobs that particularly need them, including construction, agriculture, janitorial and delivery jobs.”