DirectEmployers Association

In an unsurprising and expected move, on Thursday, May 6th the Biden Administration’s Department of Labor (“DOL”) published its Final Rule withdrawing the Trump Administration’s January 7, 2021 “Independent Contractor Status under the Fair Labor Standards Act” rule. Practically, the Biden Administration’s Final Rule keeps in place the “totality of the circumstances” economic realities test the DOL has traditionally used in determining independent contractor status under the Fair Labor Standards Act (“FLSA”) and withdraws the “focused economic-reality” test the Trump Administration sought to impose, but which the DOL never implemented. The Biden Administration cited three independent reasons for the decision to withdraw the January 7th rule:

  • The Trump Administration’s proposed rule was in tension with the FLSA’s test and stated purpose, as well as relevant judicial precedent interpreting the FLSA’s intent of protecting worker rights;
  • The proposed rule’s prioritization of two “core factors” was contrary to the balancing approach courts adopted in reviewing the totality of the circumstances governing the worker’s relationship with the business; and
  • The proposed rule would have narrowed the facts and considerations comprising the analysis of whether a worker is an employee or an independent contractor.

The purported reasons the Biden Administration identified for withdrawing the January 7th rule establishes that of the 1,010 comments the DOL received in response to its March 12, 2021 Notice of Proposed Rulemaking proposing to withdraw the rule, it relied heavily upon the comments from state officials, members of Congress, labor unions, social justice organizations, worker advocacy groups, and individual commenters writing in support of withdrawal. As the DOL notes in the published Final Rule, “These commenters expressed opposition to the Independent Contractor Rule predominantly on the basis that, in their view, the Rule would have facilitated the exploitation of workers reclassified or misclassified as independent contractors as a consequence of the rule.” Commenters raised several reasons in support of withdrawing the January 7th rule, including:

  • The fact that the proposed rule’s standard had never been used by any court or by the Wage-Hour Division of the DOL;
  • The belief that focusing on only two “core factors” was too limiting given the broad definition of “employ” that is the cornerstone of the FLSA;
  • Emphasis in the proposed rule upon the amount of control the business exerted amounted to adoption of the common law control test, which is inconsistent with the more expansive FLSA standard that employment exists when a business causes a person to “suffer or permit” work;
  • A concern as to whether a workers’ opportunity for profit or loss should be determinative of employment status;
  • The fact the proposed rule would have considered independent contractor status merely upon evidence of a workers’ investment in equipment or material, instead of balancing such investment relative to the amount of the putative employer’s investment;
  • Objection to the narrowing of consideration as to whether the work performed is “integral” to the entity’s business; and
  • The fact the proposed rule only considered the “actual practice” of control exerted, instead of the potential “control” the business could exert by contract or reservation of right.

The Trump Proposed Rule

As readers of this blog may recall, the Trump Administration’s proposal would have focused analysis on two core factors in determining whether a worker was economically dependent on an employer and thus an “employee” subject to minimum wage and overtime protections under the FLSA: the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on the worker’s initiative or investment in resources. If both these “core factors” indicated the same conclusion, there would have been a “substantial likelihood” that the classification indicated by those factors was the worker’s correct classification. Only if there was a conflict between these two core factors would analysts then evaluate as additional consideration in determining employment status the amount of skill required for the work, the degree of permanence of the working relationship, and whether the work is part of an integrated unit of production of the employer’s business.

The Current Applicable Standard

Given the Trump Administration’s proposal never went into effect (more about this below), employers should be aware that the standard they must continue to comply with in determining independent contractor status under the FLSA remains the multi-factor “economic reality” test that focuses on the totality of the circumstances. This means the DOL determines independent contractor status based on consideration of all of the below seven factors:

  • The extent to which the services rendered are an integral part of the principal’s business;
  • The permanency of the relationship between worker and business;
  • The amount of the alleged contractor’s investment in facilities and equipment;
  • The nature and degree of control by the principal;
  • The alleged contractor’s opportunities for profit and loss;
  • The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor; and
  • The degree of independent business organization and operation.

See USDOL Fact Sheet #13: Employment Relationship Under the Fair Labor Standards Act (https://www.dol.gov/agencies/whd/fact-sheets/13-flsa-employment-relationship).

What Lies Ahead

For now, the Biden Administration has indicated it does not intend to issue a new independent contractor test under the FLSA that may be more restrictive towards finding an independent contractor relationship. However, there remains both potentially good and bad news on the horizon for employers that will ensure continued uncertainty around this issue for some time, necessitating the need for continued vigilance as to potential changes.

First, employers comforted by the fact that at least the same test the DOL has used for years remains in place, thus providing at least familiarity and experience in application, should remain concerned over President Biden’s statements pertaining to independent contractor relationships. Specifically, President Biden has noted on several occasions his support of the “ABC” test similar to California’s new independent contractor rule resulting from the Dynamex Operations West, Inc. v. Superior Court decision and subsequently codified by AB5. Under the “ABC” test, it is presumed all workers are employees instead of contractors, and a worker would have to meet all three of the following factors for a business to properly classify them as an independent contractor:

  • The worker is free from the control and direction of the hiring entity in connection with the performance of the work;
  • The worker performs tasks that are outside the usual course of the hiring entity’s business (i.e., the worker cannot perform the work related to the core service or product the business offers its customers); and
  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work they are performing.

This stringent standard, similar to tests already existing in Illinois, Massachusetts, and New Jersey, may be codified nationally should the Biden Administration determine it has the support necessary to implement through administrative regulation or through Congressional legislation. Given the support President Biden has expressed, as well as the support Secretary of Labor Marty Walsh has indicated for this standard, this potential change remains a viable option for implementation to the detriment of employer interests.

Alternatively, while the Trump rule never went into effect, pending litigation in Texas is seeking a court order implementing such rule. On March 26, 2021, the Coalition for Workforce Innovation and the Associated Builders and Contractors, Inc. filed suit in the U.S. District Court for the Eastern District of Texas seeking to put into effect the Trump independent contractor rule. Specifically, the plaintiffs seek a declaratory judgment against the Biden Administration DOL, arguing that the DOL’s delay of the March 8, 2021 effective date of the Trump rule was “arbitrary and capricious” and in violation of the Administrative Procedures Act. Plaintiffs seek a court order ruling that because the delay was in violation of the Administrative Procedures Act, the delay must be overturned, the Trump rule would then become effective as of March 8, 2021, and would thus render obsolete the Biden Administration’s Final Rule of May 6th. Thus, employers should keep an eye on any developments in such litigation that may result in another swing in the independent contractor analysis.

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