From JDSupra, Andrew McKinley, Alex Simon, and Kyle Winnick provide a detail analysis of the Department of Labor’s proposed independent contractor rule as part of a multipart series. In this part, they discuss the proposed rule’s handling of the issue of control in determining if a worker is an employee or independent contractor. Andrew, Alex and Kyle write:
Seyfarth Synopsis: This first part of a multi-part series explores the implications of the Department of Labor’s proposed independent contractor rule under the Fair Labor Standards Act. Specifically, it focuses on proposed changes to the control factor concerning legal, safety, contractual, and other similar requirements.
As we detailed here, on October 11, 2022, the Department of Labor (DOL) issued a notice of proposed rulemaking (“NPRM”) defining employee versus independent contractor status under the Fair Labor Standards Act. If promulgated, the NPRM would rescind and replace an interpretive regulation promulgated by the DOL in 2021 under the Trump Administration (the “2021 Rule”), which attempted to revamp and modernize the standard for determining employee status under the FLSA, as discussed here.
Courts have long held that the ultimate inquiry when determining employee versus independent contractor status under the FLSA is whether the worker is economically dependent on the putative employer. One factor considered under this inquiry is the nature and degree of the worker’s versus the putative employer’s control over the work performed. In this first part of a multi-part series on the NPRM, we take a closer look at how the NPRM re-defines employer control, for purposes of determining employee status.
Not all control or oversight is voluntary. As any company in the airline, energy, financial services, healthcare, insurance, or logistics industry knows, regulatory compliance often requires businesses to exercise a certain amount of oversight and control over workers, irrespective of whether the individual is an employee or independent contractor. Such control is not dictated by the whims of the company to cabin a worker’s judgment, but instead a reflection of restrictions imposed by federal and state laws and agencies. Aligning with a long line of cases, and other regulatory guidance, the 2021 Rule opined that control stemming from compliance with legal requirements is not indicative of employee status, because laws apply to both workers and employees alike and because compliance with such laws—which are often designed to protect workers and consumers—should be encouraged. Indeed, even under the so-called ABC test employed in some states, which presumes a worker is an employee, courts have found that compliance with regulatory requirements does not evidence control for purposes of employment.
Relatedly, prior to the NPRM, a long line of cases found that contractual warranties of quality and time of delivery had no bearing on the employment inquiry. This makes good sense: businesses want contractual assurances that they will receive contracted-for products in a timely manner and in good quality. In fact, some businesses need goods delivered at a specific time, such as businesses dealing with perishable goods or customer commitments. Such contractual warranties have nothing to do with one business wanting to control the workers of another business. They merely ensure that a company receives the end result for which it has contracted, and leave the business free to determine how it will achieve that result. In short, such contractual assurances are standard—and, indeed, expected—aspects of most functional business-to-business relationships.
Yet, departing from these well-established principles, the NPRM proposes a different interpretation: “[c]ontrol implemented by the employer for purposes of complying with legal obligations, safety standards, or contractual or customer services standards may be indicative of control.” The NPRM does not disclaim that there may be many instances in which such compliance efforts would not be evidence of control, but despite the DOL’s stated goal of providing clarity, it also provides precious little in the way of guidelines as to when it would be evidence of control. And the examples it does provide of situations probative of control—e.g., mandating a specific time and location for safety briefings—focus more on external factors attendant to the requirement (e.g., mandating attendance at a meeting) than on the ultimate legal, contractual, or other requirement being communicated. Nevertheless, the ambiguous use of “may” could open the door for courts and the DOL to find that the control factor favors employee status for workers long considered independent contractors working in highly-regulated industries based on little more than the ambiguity introduced by the NPRM. This, in turn, could risk large segments of workers in these industries being found to be employees because, as some courts have recognized, the control prong can often be the most significant.
This standard would likewise open the door to finding that contractual warranties of quality and timeliness is indicative of employer control, despite being standard elements of business relationships. The implications are broad: any business that has a service contract with an independent third party risks being found the employer of the third party (or his/her workers) simply be agreeing, for example, on when a project will be completed. Moreover, because the NPRM—again departing from the 2021 IC Rule—would find that contractually reserved control is just as indicative of employee status as actual control, this risk remains even when a company does not strictly hold the third-party to its contractual commitments. Thus, if a business contractually reserves the right to cancel a contract if legal requirements are not adhered to, the quality of the deliverables is poor (or done in a way that undermines the purpose of the contract or deliverables altogether), or other commitments are not met, a court following the NPRM may find this to be evidence of employee status. The upshot is that the control prong of the NPRM, if enacted, would tilt the scales in favor employee status, while simultaneously failing to account for the everyday realities of most business-to-business arrangements. Accordingly, were a court to accept this departure from the 2021 Rule and prior caselaw, it would potentially make classifying workers as independent contractors more difficult, especially for those businesses operating in heavily-regulated industries.
 See U.S. v. Silk, 331 U.S. 704, 716 (1947).
 See, e.g., Parrish v. Premier Directional Drilling, L.P., 917 F.3d 369, 387 (5th Cir. 2019); Iontchev v. AAA Cab Serv., Inc., 685 F. App’x 548, 550 (9th Cir. 2017); Chao v. Mid-Atl. Installation, 16 F. App’x 104, 106 (4th Cir. 2001).
 For example, the Internal Revenue Service (IRS) has long considered control stemming from compliance with laws, rules, and regulations as not indicative of employee status. See IRS, Training Materials: Independent Contractor or Employee?, available at https://www.irs.gov/pub/irs-utl/emporind.pdf , at 2-11 (Oct. 30, 1996).
 See, e.g., L. Off. of Gerard C. Vince, LLC v. Bd. of Rev., 2019 WL 4165066, at *3 (N.J. Super. Ct. App. Div. Sept. 3, 2019).
 See, e.g., Zheng v. Liberty Apparel Co. Inc., 355 F.3d 61, 75 (2d Cir. 2003).
Source: DOL’s Proposed FLSA Independent Contractor Rule: Control—Part I | Seyfarth Shaw LLP – JDSupra