Spoiler Alert on Upcoming Labor Department Regulation on Independent Contractor ‎Status: A Big Splash in the News But Not Legally Meaningful

From JDSupra, Richard Reibstein provides an excellent analysis of the United States Department of Labor’s proposed independent contractor regulation concluding “[i]n sum, once it becomes final, the Biden proposed regulation is unlikely to do little more than formally undo the Trump 2021 Rule and restore a totality-of-the-circumstances approach to determining IC status.” Richard writes:

It’s been almost a full year since the U.S. Department of Labor issued its proposed regulation entitled “Employee or Independent Contractor Classification under the Fair Labor Standards Act.” The proposed regulation was fully intended to overwrite the Trump Administration’s regulation covering the same subject, which the Biden Administration felt was weighted in favor of businesses. Over 55,000 comments to the proposed regulation were posted in a two-month period by individuals and organizations both in support of and in opposition to the proposed regulation. Informed sources indicate that a final regulation is expected to be released this month, perhaps as soon as this coming week. We anticipate that the final regulation will contain few if any meaningful changes from the proposed regulation despite the tens of thousands of comments. But, does it really matter – at least legally? And what will the practical effects be?

Last October, on the same day the proposed regulation was released to the public, we published a a comprehensive blog post and asked rhetorically in the opening paragraph of that post, “What would this [regulation] mean legally for both workers and businesses who are currently classified as ICs?”  Our response was:  “Not much, … since it is the courts that create law on this subject, not regulatory agencies.” We then added, however, that the proposed regulation, once finalized, would likely create a great deal of anxiety among businesses and many independent contractors, concerned (even though they shouldn’t be) that the ground beneath them is now shifting.

We also projected that when the proposed regulation was issued in final form, it would give impetus to disaffected workers who currently receive 1099s and their lawyers to file class actions seeking minimum wage or overtime payments under applicable laws. That expected impetus will likely be fueled mostly by commentators and stakeholders that fail to appreciate one or more of the following:

  • the Labor Department is an enforcement agency, not a judicial body, and it only brings lawsuits in court and does not make legal determinations;
  • the Labor Department typically files only a modest number of independent contractor misclassification cases in court each year, and most of those cases tend to be “low-hanging fruit” (i.e., cases in which the defenses are weak) where a court decision would likely be the same under both the Trump and Biden Administration’s regulations;
  • the Biden Administration’s final regulation (like the rule issued by the Trump Administration) is unlikely to be given much credence by the courts, which follow decades of decisions addressing IC misclassification issues upon which they will continue to rely; and
  • the Labor Department’s regulation only governs federal law, whereas a far greater concern for most companies using independent contractors are state laws, which are wholly unaffected by any regulation issued by the U.S. Department of Labor.

Prudent businesses should therefore anticipate a heightened risk of litigation and seek to minimize their exposure to IC misclassification liability, as we discussed below in our “Takeaway.”

The Final Biden IC Rule Will Replace the Trump IC Rule

In an earlier blog post, we covered the history of the Biden Administration’s proposed independent contractor classification rule issued in October 2022, discussing how it was intended to replace the rule issued by the Trump Administration in January 2021 – only a month before that administration came to an end.

The 2021 Rule, as we noted in our blog post when that regulation was published, focused on two “core” factors: the nature and degree of control over the work and the worker’s opportunity for profit or risk of loss. The 2021 Rule also identified three other less probative “non-core” factors: the amount of skill required for the work, the degree of permanence of the working relationship, and whether the work is an integral part of the purported employer’s business. This approach by the Trump Administration’s Labor Department was premised on its view that it was reciting the prevailing law on the so-called “economic realities test” created by the courts.

The proposed 2022 Rule on independent contractor classification states that it seeks to “restore” the economic realities test used by the courts to determine IC status.  As stated in the proposed Rule’s Executive Summary, instead of focusing on “core” and “non-core” factors that were the central considerations in the 2021 Trump Rule, the new regulation will focus on “the totality-of-the-circumstances analysis in which the economic reality factors are not assigned a predetermined weight and each factor is given full consideration.” This approach, the Labor Department stated in its proposed rule, is “aligned with the Department’s decades-long approach (prior to the 2021 IC Rule) as well as circuit [court] case law.”

The biggest difference between the 2021 Trump Rule and the proposed 2022 Biden Rule appears to be the latter Administration’s effort to place more weight on one of the three “non-core” factors: whether the work is integral to the employer’s business. This factor almost universally favors employee status, thereby causing many courts over the past decade to give it less weight than the other factors under consideration. The Biden Rule seeks to make that factor more important going forward, but it is unlikely the courts will change their precedent and give more weight to that factor.

The Biden 2022 Rule, like the Trump 2021 Rule, was preceded by a recitation of court decisions under the FLSA. Not surprisingly, the two rules view the cases quite differently than the other. The Trump Rule was akin to a legal brief for business advocates to support independent contractor status, while the Biden 2022 Rule was more in the nature of a legal brief to support employee advocates, focusing on a similar body of court decisions yet viewing them from a more pro-employee perspective.

Here are the details of the proposed regulation:  six factors in particular should be considered in determining the so-called “economic reality” of the parties’ relationship, which has, for decades, also been the general focus of the courts:

  1. Opportunity for profit or loss depending on managerial skill.
  2. Investments by the worker and the purported employer.
  3. Degree of permanence of the work relationship.
  4. Nature and degree of control over the performance of the work and the economic aspects of the working relationship.
  5. Extent to which the work is an integral part of the purported employer’s business.
  6. Skill and initiative of the worker.

The Biden 2022 Rule then would also add a seventh factor: “Additional Factors,” which is described as any factors that “in some way indicate whether the worker is in business for themsel[ves], as opposed to being economically dependent on the employer for work.”

After each of the six factors listed in the proposed regulation, there is a one paragraph description of how the Labor Department believes the courts should apply each factor. That is the where the new regulation varied from the Trump 2021 Rule because these brief descriptions are tilted in favor of employee status. However, the six factors themselves are similar to those recited by many courts as key to whether workers are employees or independent contractors in view of the economic realities of the parties.

In sum, once it becomes final, the Biden proposed regulation is unlikely to do little more than formally undo the Trump 2021 Rule and restore a totality-of-the-circumstances approach to determining IC status. Its focus on six factors (and a catch-all of additional factors) is hardly controversial, although the description of how the courts should apply each factor favors employee status.

The Final Regulation Will Not Be Meaningful From a Legal Perspective

In early January 2021 when the Trump Administration issued its regulation on independent contractor classification, we noted in our 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 proposed regulation, once finalized, will be quite similar in that regard.

The courts, not regulatory bodies, have the final say on who qualifies as an independent contractor and who does not.  Regulations are not laws. While courts typically give deference to valid regulations, that is not a given where regulations keep changing and where the regulation appears to be little more than an agency’s interpretation of prior court decisions on a particular subject.

Another reason why the proposed new rule once finalized will be limited in its application is because it pertains to only one statute: the FLSA.  The test for independent contractor status under the FLSA is not the same as the IC 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 IC status and they contain an array of different tests, only a few of which use the economic realities test under the FLSA.

Takeaway

Companies that utilize ICs cannot help but be perplexed by the back and forth and back again at the Labor Department from one administration to the next on the issue of independent contractor classification. Businesses that use independent contractors should consider a two-step approach to minimize any legal challenge to their independent contractor relationships: (1) enhancing their compliance with federal and applicable state independent contractor laws to maximize independent contractor compliance in the event a state or federal workforce or tax agency conducts an audit; and (2) minimizing the likelihood of class actions by adding to their IC agreements a state-of-the-art arbitration provision with a class and collective action waiver or upgrading their existing arbitration agreements in view of the many recent developments in this area of the law.

Independent contractor relationships that are structured, documented, and implemented in a manner consistent with applicable law can serve to minimize IC misclassification liability – regardless of any regulation issued by the U.S. Department of Labor. Businesses should avoid quick fixes or one-size-fits-all approaches, which not only tend to be ill-fitting but often backfire by creating evidence that the company’s practices deviate from the language in its IC agreement. Instead, many businesses have created independent contractor relationships that are customized and sustainable using a process such as IC Diagnostics™ to restructure, re-document, and/or re-implement their IC relationships consistent with their existing business model.

Businesses should also take steps to ensure they have an effectively-drafted arbitration clause in their IC agreements. As we stated in a blog post on this subject, “[w]hether an arbitration agreement in an independent contractor or employment setting will bar a class action depends as much of the wording in the arbitration clause as the applicable law, which is in flux and continues to evolve.” That reality strongly suggests that existing arbitration clauses used in independent contractor agreements should be reexamined and updated every few years.

Source: Spoiler Alert on Upcoming Labor Department Regulation on Independent Contractor ‎Status: A Big Splash in the News But Not Legally Meaningful ‎ | Locke Lord LLP – JDSupra

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