U.S. DOL Signals Tougher Stance on Federal Classification of Workers as Independent Contractors

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On May 6, 2021, the United States Department of Labor (DOL) withdrew proposed rules set by the Trump Administration, which were originally intended to revise the test for classifying workers as independent contractors at the federal level for wage and hour purposes under the Fair Labor Standards Act (FLSA). The DOL’s withdrawal alleges that the rules, which were originally set to take effect on May 7, 2021, would have been contrary to the FLSA’s text, purpose, and judicial precedent.

The Trump-era rules, which never took effect, would have largely maintained the “economic realities” test to determine whether a worker is in business for himself/herself (an independent contractor) or is economically dependent on the employer for work (an employee) for purposes of the FLSA by considering the following factors:

  1. The extent to which the services rendered are an integral part of the principal's business.
  2. The permanency of the relationship.
  3. The amount of the worker’s investment in facilities and equipment.
  4. The nature and degree of control by the principal.
  5. The worker’s opportunities for profit and loss.
  6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the worker.
  7. The degree of independent business organization and operation.

Although none of the above factors are stringent requirements, the Trump-era rules would have emphasized the importance of the degree of control asserted by the principal and the worker’s opportunities for profit and loss (the 4th and 5th factors in the above analysis).

Numerous businesses, especially those in the gig economy, would have benefitted significantly from these rules, which would have de-emphasized the focus on whether the services are an integral part of the principal’s business, the permanence of the relationship, the degree of investment by the worker, the amount of independent judgment utilized by the worker, and the degree of independent business organization/operation (Factors 1-3 and 6-7).

While the DOL’s withdrawal of the Trump-era rules simply means that these changes will not take effect, employers should stay up to date on ongoing changes in this body of law, as they may signal that the Biden Administration will, sooner or later, seek more stringent requirements and/or interpretations of existing law, just as the Trump Administration sought less restrictive ones.

Furthermore, hiring entities should also stay up to date on legal developments in the states where they conduct business, as applicable state law may be much stricter than federal law on this subject matter. In fact, many states, including California and Massachusetts, now apply the more stringent ABC test to determine whether a worker is an independent contractor or an employee. These states’ ABC test requires a showing of the following to establish independent contractor status:

A. That the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact, and

B. That the worker performs work that is outside the usual course of the hiring entity’s business, and

C. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

(Click here for an in-depth discussion of the ABC Test in California). Similarly, other states have adopted the ABC test in at least some contexts, such as unemployment insurance, while utilizing another test for the purposes of wage and hour laws (including minimum and overtime wage calculations). Just as the change in California law was sudden, and later applied retroactively, hiring entities in other states might also have expensive change abruptly imposed on their business operations. They should cautiously observe potential changes by their states’ agencies and legislatures, in addition to changes at the federal level.

For example, in California, businesses whose independent contractor arrangements do not “pass” the ABC test could be subject to significant penalties, in addition to unpaid taxes, unemployment benefits, meal and rest period premiums, and unpaid wages by state and local governments, and may face private actions by individuals brought in class and representative capacities.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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