The Department of Labor (DOL) has waded into the independent contractor controversy in a big way by having its Wage and Hour Division (WHD) issue a 160-page proposed rulemaking that would reverse the Trump Administration Labor Department’s stand on the issue.
“While independent contractors have an important role in our economy, we have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation’s most vulnerable workers,” said Secretary of Labor Marty Walsh when he announced the rule proposal in mid-October.
“Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages,” he added. “The Department of Labor remains committed to addressing the issue of misclassification.”
If adopted, the proposed rule would apply to enforcement issues involving the Fair Labor Standards Act (FLSA), which provides the legal authority for setting and enforcing federal minimum wage and overtime standards.
This action is the latest barrage fired in the continuing battle over independent contractor status being waged at the federal and state levels. Although the central points of contention can include insurance and tax issues, the main thrust of this crusade has been fueled by labor unions’ desire to organize many of these workers, who when seen as independent business operators cannot collectively bargain because of antitrust laws.
Democrats in the Biden administration and Congress have been actively pursuing this objective. Agencies such as the National Labor Relations Board (NLRB) and Federal Trade Commission (FTC) have initiated actions along these lines. A keystone piece of the Democrat legislative agenda—the Protecting the Right to Organize Act (PRO Act)—was introduced at the outset of the Biden presidency containing language that would severely restrict independent contractor status, although the bill has not passed.
The most significant action taken in recent years was the enactment of a sweeping state law in California that bans most kinds of independent contractors, including owner-operators in the trucking industry. The central sticking point in that law is a three-part “ABC” test which says no one can be considered a contractor if they are operating in the same line of work as their employer.
As a result, a plumber doing work for a grocery store can maintain independent status, but a truck driver leasing his truck and services to a trucking company cannot. This same ABC test is included in the language of the PRO Act and other states have been considering adopting it. The California statute survived an appeal to the U.S. Supreme Court, which refused to hear the case earlier this year.
The new rule proposed by DOL does not suggest adopting something similar to the California ABC test, but it would erect a complicated structure of hurdles that would need to be overcome in order to establish independent contractor status which could impact trucking in at least one respect.
Instead of the simple three-part ABC criteria adopted in California, DOL is casting a wider net by proposing a six-part list of requirements for contractors and employers to meet that mirrors the approach taken by the department during the Obama administration.
DOL expressed its belief that the Trump administration’s rule that narrowed the economic realities test to make it easier for workers to qualify as independent contractors did not comport with the Federal Labor Standard Act (FLSA) text and purpose as interpreted by decades of case law. Subject to court challenges, the Biden DOL’s withdrawal of the Trump rule was allowed to go into effect at the time the new rule proposal was announced.
Instead, the Biden DOL seeks to return to the totality-of-the-circumstances approach to the economic realities test embraced by the Obama administration in its previous revision of FLSA standards and offers detailed guidance in regard to how the underlying factors should be applied.
The new economic realities test would return the focus from two core factors to focus on six non-exhaustive factors to determine whether the workers are economically dependent on the employer for work (employees) or in business for themselves (independent contractors), explain attorneys Brenna Hull, Brent Hamilton and Jeffrey Bosley of the law firm of Davis Wright Tremaine.
They describe the six factors the proposed rule lays out as:
1. Opportunity for profit and loss depending on managerial skill. If the worker exercises managerial skill that affects their opportunity for profit, they are more likely to be an independent contractor. This factor can also consider whether the worker can negotiate pay, decline or reprioritize work, market themselves to secure more work, decide to hire employees, purchase materials and equipment, or rent space.
2. Investments by the worker and the employer. Capital or entrepreneurial investments by the worker to support an independent business weigh in favor of contractor status. The worker’s investments should be considered relative to the investments by the employer but do not need to be equal in order to support independent contractor status.
3. Degree of permanence of the work relationship. Definite, non-exclusive, project-based, or sporadic work weigh in favor of independent contractor status, although seasonal and temporary work does not necessarily indicate independent contractor status.
4. Nature and degree of control. Lack of control by the employer over the worker’s performance may indicate independent status. This may include whether the employer sets the worker’s schedule, degree of supervision, limitations on the worker’s ability to work for others, and employer control over rates and prices.
If adopted in its present form, the proposed rule would expand the Trump era definition of control to include economic aspects of the working relationship, legal compliance, safety standards, and contractual or customer service standards, which may each provide indicia of control favoring employee or independent contractor status.
It is this provision that has caused some legal observers to contend the rule could pose serious problems for trucking companies who require owner-operators to comply with government regulations, unless it is clarified in the final rule.
5. Extent to which work performed is an integral part of the employer’s business. When the work performed is not critical, necessary, or central to the employer’s business, this factor weighs in favor of the worker being an independent contractor. The factor does not focus on the role of the worker but, instead, the role of the function they perform to the business.
6. Skill and initiative. A worker’s use of specialized skills and use of those skills in connection with a businesslike initiative indicates the worker is more likely to be an independent contractor.
The rule proposal also provides a seventh, catchall, factor that states additional factors “may be relevant” if the factor in some way indicates whether the worker is in business for themselves or economically dependent on the employer.
“Employee versus independent contractor misclassification can potentially cause significant liability for employers, including risk of class actions or government audits and investigations,” the Davis Wright Tremaine attorneys point out.