The U.S. Department of Labor today issued a rule yesterday that withdraws the Trump Administration’s regulation setting forth a test to classify workers as independent contractors or employees under the federal Fair Labor Standards Act. Ordinarily, rules set forth new standards, but this one was quite unusual – it essentially rejected a rule issued by a prior Administration and, in doing so, foretells a return to the Obama era in terms of the Labor Department’s position as to who is and who is not an independent contractor. The Labor Department’s view, however, is not particularly meaningful, at least from a legal perspective. But it sends a signal to businesses that this Administration views IC misclassification through a different lens. As a result, more companies are likely to ask, do we now need to enhance our independent contractor compliance? We address that issue below and provide some guidance for businesses seeking ways to minimize their exposure to IC misclassification liability.
Is This New Rule Legally Meaningful?
On the day the Trump Administration issued its regulation on independent contractor classification in early January 2021, we noted in a blog post that “the regulation…would be ‘much ado about (almost) nothing.’” We remarked that, “unlike most regulations with hard and fast rules, the proposed regulation was in the nature of an administrative interpretation comprising the Labor Department’s review of existing court decisions and its articulation of a preferred legal analysis … [that] courts would give little if any deference to.” The Biden administration’s new rule is no different in our view. The issue of independent contractor status, particularly in the gig economy, has become so politicized of late that even legally meaningless acts by administrative agencies have generated outsized attention from stakeholders, even though the courts, not regulatory bodies, have the final say on who qualifies as an independent contractor and who does not.
What Reasons Did the Labor Department Give for Withdrawing the Old Rule?
The new rule issued by the Labor Department is lengthy but its conclusion is brief, confirming our view that judicial precedent, not administrative regulations, determine independent contractor status. The new rule states: “Having considered the comments submitted in response to the [proposed new rule], the Department has decided to finalize the withdrawal of the Independent Contractor Rule. The Department believes that the Rule is inconsistent with the FLSA’s text and purpose, and would have a confusing and disruptive effect on workers and businesses alike due to its departure from longstanding judicial precedent.”
The new rule then addressed the differences between the Trump Administration’s view of court decisions and the Biden Administration’s reading of the same group of cases dealing with independent contractor status under the FLSA.
The new rule initially notes that the “[prior] Rule’s standard has never been used by any court or by [the Labor Department’s Wage and Hour Division], and is not supported by the [FLSA]’s purpose or judicial precedent.” It states that the Trump rule focused too much on the issue of “control,” thereby making the standard more like the “common law” test used by the courts under the tax code and less like the “economic realities” test used by judges for decades.
The new rule also says that the old rule mischaracterized court decisions regarding an important factor in independent contractor determinations: does the worker has an opportunity for profit or the risk of loss. In addition, the new rule found that the old rule failed to consider the disparity between the amount of the company’s investment in its business and the investment by the worker and rather focused attention only on the latter.
The new rule, in addition, notes that the old rule did not give due regard to judicial decisions that focus on the “centrality of a worker’s work to the employer’s business” and “downplay[ed] the employer’s right or authority to control the worker.”
The Labor Department added that the old rule “would complicate rather than simplify the analysis for determining whether a worker is an employee or independent contractor under the FLSA.” Lastly, the new rule states that the old rule did not consider whether it would have benefitted workers as a whole.
What Does All This Mean Going Forward?
The old rule and new rule are similar to opposing legal briefs by lawyers for businesses and workers, respectively – the types filed with a court considering whether workers are employees or independent contractors. Most courts considering that issue would undoubtedly agree with some of the arguments in support of the old rule and some in favor of the new rule.
The new rule is consistent with the views of the Obama era’s Administrator of the Wage and Hour Division of the U.S. Department of Labor, David Weil, who issued an Administrator’s Interpretation on the subject in July 2015. Dr. Weil has been nominated by President Biden to the same position he held in 2015. The public should therefore expect that he will issue new guidance in 2021 similar to his 2015 Interpretation.
But there is hope for businesses and independent contractors who wish to maintain that type of relationship. On the first page of Dr. Weil’s Interpretation, he stated that legitimate independent contractor relationships “can be advantageous for workers and businesses.” He also stated publicly during his tenure as Administrator that although an independent contractor relationship should not be used to evade compliance with federal labor law, “the use of independent contractors [is] not inherently illegal [and] legitimate independent contractors are an important part of our economy.”
The new rule states that the old rule “failed to consider” whether it “would have benefitted workers as a whole.” Yet, data addressing the views of those workers reflects that those who are classified as independent contractors overwhelmingly prefer their work arrangements to traditional employment. See studies issued by the U.S. Bureau of Labor Statistics and the Government Accountability Office, as well as a respected polling organization. Hopefully, the view of the most important stakeholders – the independent contractors themselves – will be considered by the Biden Administration’s Labor Department.
This new rule has limited legal significance for yet another reason – it retains to only one statute: the FLSA. The test for independent contractor status under the FLSA is not the same as the classification test under the Internal Revenue Code, ERISA, or the National Labor Relations Act. And, of course, each state has its own set of laws governing independent contractor status and they contain an array of different tests, only a few of which use the test under the FLSA.
Companies utilizing independent contractors cannot help but be confused by the Independent contractor ping pong reflected at the U.S. Department of Labor from one administration to the next. Businesses that use independent contractors should consider enhancing their compliance with federal and applicable state independent contractor laws to maximize independent contractor misclassification compliance.
IC relationships that are structured, documented, and implemented in a manner consistent with applicable law can serve to minimize IC misclassification liability. Companies should avoid quick fixes or one-size-all approaches, which tend to be ill-fitting and often backfire on the business. Instead, many businesses have created independent contractor relationships that are customized and sustainable using a process such as IC Diagnostics™.