On January 7, 2021, the U.S. Department of Labor (DOL) published a final rule (Rule) to be applied in determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA), which is scheduled to take effect on March 8, 2021. Although the majority of the 1800 comments the DOL received on the proposed Rule were supportive of the Rule’s efforts to provide clarity to the stakeholders regarding how to distinguish between employees and independent contractors, there is a consensus that the new standards will result in more workers being classified as independent contractors than under prior rules. Based on public statements by the Biden administration, the new administration appears to view classification of a greater number of workers as independent contractors as an undesirable outcome, and as such, the Rule may well be suspended before it ever goes into effect.
Purpose of the New Rule
The DOL explains in the preamble to the new Rule, that “[t]he ultimate inquiry is whether, as a matter of economic reality, the worker is dependent on a particular individual, business or organization for work (and is thus an employee) or is in business for him-or herself (and is thus an independent contractor).” The DOL devotes considerable effort in the explanation of the Rule to describe the historical uncertainty that surrounds the employee vs. independent contractor determination, with the first U.S. Supreme Court case under FLSA dating back to 1947. The new Rule is an effort to streamline the analysis by having the determination made based on the most salient factors, and de-emphasizing data points that tend to have a lesser bearing on the outcome.
Factors Under the New Rule
The Rule identifies five distinct factors—with two being the most probative core factors—which are:
- The nature and degree of the worker’s control over the work, and
- The worker’s opportunity for profit or loss.
The DOL identified three other factors that may be considered in certain cases, but cautioned that in many cases not all of these factors will be relevant, and in some cases none of these factors may be applicable. The first of these factors is the amount of skill required for the work (the greater the skill, the greater likelihood a person is an independent contractor). A second factor is the degree of permanence of the working relationship between the individual and the putative employer (the more permanent the relationship, the more likely one is to be an employee). A final factor to consider is whether the work is part of an integrated unit of production (one is more likely to be an employee if their work is integrated as part of the process for creating a good or providing a service). The DOL goes on to explain that in making the determination, actual practices by the parties are entitled to much greater weight than any written contracts that might purport to frame the relationship.
The Internal Revenue Service (IRS) devotes considerable effort to classifying workers as either employees or independent contractors, because this determination has employment tax and income tax withholding implications. The IRS tends to focus on the degree of control the putative employer has over the worker (the greater the control, the more likely the worker is an employee), but analyzes other factors such as the behavioral control, financial relationship and nature of the working relationship. The Rule applies (assuming it goes into effect) for purposes of determinations by the DOL under the FLSA only; it does not purport to alter the analysis the IRS might utilize when reviewing the classification of workers for employment and income tax purposes.
President Joe Biden has espoused a view that many companies incorrectly classify workers (particularly “gig workers”) as independent contractors to deny them benefits they would have enjoyed as employees, and signaled a desire to enforce the rules aggressively to cause such workers to be reclassified as employees. Given that the Rule tends to have the opposite effect, members of Biden’s transition team expressed a desire to “halt or delay” the Rule as soon as they were empowered to do so. To that end, on January 20, Biden’s chief of staff issued an order to the heads of all executive departments and agencies, advising them to “consider postponing” any rules that had already been published in the Federal Register but had not yet taken effect (which includes this rule by the DOL) for 60 days from January 20, and to consider opening a new 30-day public comment period on those rules. Thus, it seems unlikely that the Rule will become effective in March 2021, as scheduled.
The Biden administration prefers the so-called ABC test used in California, which presumes workers are employees unless:
- The worker is free from the control of the employer,
- The worker performs work outside the usual course of the employer’s business, and
- The worker is customarily engaged in a similar, independently established business.
The problem with the Biden administration’s affinity for this rule is that, according to the legal analysis by the DOL in the preamble to the Rule, the ABC test is contrary to U.S. Supreme Court precedent, so it would take an act of Congress to adopt that standard. Moreover, the DOL may find it hard to walk-back its prior statements about the ABC test, including its unequivocal statement that “the Department continues to believe that the ABC test would be infeasible, difficult to administer, and disruptive to the economy if adopted as the FLSA standard.” Thus, it may be that the DOL under Biden may delay or repeal the new Rule, but struggle to enact a replacement, bringing companies back to the patchwork of tests that was the status quo before the new regulation was published.