Withdrawal of independent contractor rule could hurt construction

U.S. Department of Labor Secretary Marty Walsh said the latest decision will help preserve essential worker rights (REUTERS)

The U.S. Department of Labor (DOL) has ruled that independent contractor status will remain unchanged with its withdrawal of a Trump-era rule that would have made it easier to classify workers as independent contractors under the Fair Labor Standards Act.

Effective May 6, 2021, the latest move was met with opposition from some construction industry officials who say the decision limits individual freedom and muddies the waters surrounding compensation, taxes and benefits for workers.

What is the independent contractor rule?

Fast-tracked by the Trump administration and finalized on Jan. 7, 2021, the independent contractor rule aimed to reaffirm that independent contractors are not employees under the FLSA and are not entitled to minimum wage or overtime pay under the Act.

The move to withdraw the rule comes with no replacement or new guidance and employers are advised to rely on past court decisions and DOL Wage and Hour Division guidance to determine whether those workers are employees under the FLSA or independent contractors.

In explaining the rationale for its latest decision, the DOL stated it “believes that the [independent contractor rule] is inconsistent with the [Fair Labor Standards Act’s] text and purpose, and would have a confusing and disruptive effect on workers and businesses alike due to its departure from longstanding judicial precedent,” according to a report from the National Law Review.

“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.

“Too often, workers lose important wage and related protections when employers misclassify them as independent contractors,” he said.

Construction officials, for their part, have voiced opposition. 

Independent contractors and construction

Associated General Contractors of America (AGC) stated it has long called for federal clarification of the independent contractor status and preservation of legitimate independent contractor relationships, such as those that have historically existed in the construction industry.

The trade organization supported the Trump administration’s rule that adopted what it states is a “consistent, clear and common-sense standard for determining independent contractor status under the FLSA” and filed comments opposing the DOL move to withdraw the rule. 

“The measure... makes it extremely difficult for entrepreneurial workers to establish their own businesses by discriminating against independent contractors,” Stephen E. Sandherr, CEO of AGC, said in a statement earlier this year, noting that withdrawal of the rule “will undermine many working people’s ambitions to establish their own firms and become self-employed.”

Ben Brubeck, vice president of regulatory, labor and state affairs for Associated Builders and Contractors (ABC), said the organization supported the indepdendent contractor rule, as well as the joint employer rule, which says an employee may have - in addition to his or her employer - one or more joint employers, additional individuals or entities who are jointly and severally liable with the employer for the employee’s required minimum wage and overtime pay.

“It is disappointing that the Biden administration announced proposed rules to rescind both the joint employer and independent contractor final rules,” he said. “ABC strongly supported both final rules because they promised to promote economic growth in the construction industry by providing greater clarity and removing unnecessary burdens on construction industry employers.”

Brubeck stated the withdrawal is bad for small businesses and the construction industry.

“This move... brings independent contractors - an essential lifeline to the construction industry - back to the inadequate standards previously in place, which could damage the U.S. economy and deprive many independent workers of opportunities to succeed.“

The question of independent contractor status is part of a larger initiative called the Protecting the Right to Organize (PRO) Act which proponents say aims to provide protections for workers trying to organize. The U.S. House of Representatives approved the measure in March, however a lack of support from a Republican Senate is likely to stall it. 

What is the PRO Act?

The proposal PRO Act would amend the National Labor Relations Act (NLRA) by repealing right-to-work laws designed to protect employees by preventing them from being fired for not supporting a union with which they do not wish to affiliate. There are 27 states which have voted in support of right-to-work. For their part, unions do not support right-to-work because it diminishes their influence and income from membership dues.

Supporters of the PRO Act say the bill protects workers against being fired or otherwise penalized for organizing a union. They also claim it gives workers more freedom to organize without employer interference.

Opponents, such as Michael Bellaman, president and CEO of ABC, say it limits freedom.

“This undemocratic bill would strip workers of entrepreneurial opportunities to freelance as independent contractors, denying them the freedom to earn a living on their own terms and pursue the American dream,” he said. “The PRO Act would do anything but ‘Build Back Better.’”

Rule withdrawal hampers infrastructure progress

Doug Carlson, chief executive officer of the National Utility Contractors Association (NUCA), said withdrawal of the independent contractor rule adds to confusion and could hamper economic recovery stemming from proposed infrastructure spending. 

“The Labor Department’s withdrawal of the balanced changes to the FLSA independent contractor rule that employers were planning to use in their operations is going to lead to even more uncertainty in the workplace,” he stated. “The proposed ‘economic realities test’ would have provided common-sense clarity to NUCA members using subcontractors for their infrastructure projects.”

He continued, “The Biden Administration is promoting infrastructure projects as the economic engine to get this nation back to work. But when the same administration introduces this unnecessary depth of confusion into the very engine of national growth, it remains hard to see how another interpretation of the independent contractor rule is going to deliver more jobs, clean water, and reliable high-speed broadband to American communities.

“The Biden Administration needs to do better if it is to deliver on its economic promises to America,” he concluded.