Winstead PC Shareholder Taylor White published his column in Texas Lawyer about labor and employment issues and trending topics. The article is titled “Misclassification Whiplash: US Department of Labor Withdraws Independent Contractor Rule.” The article is below:
As of May 6, the United States Department of Labor withdrew the Trump Administration’s “Independent Contractor Rule” (Rule). The Rule, had it gone into effect, would have arguably been more employer-friendly in that it would have potentially broadened the factual circumstances in which an independent contractor relationship could be found. It did so by focusing a 5-factor analysis on two “core factors,” which were “(1) [t]he nature and degree of the worker’s control over the work; and (2) the worker’s opportunity for profit or loss.”
The Department of Labor believed the rule was at odds with the FLSA’s statutory text and existing judicial precedent regarding the same. Specifically, the Department of Labor stated that the Rule’s focus on “two ‘core factors’ for determining employee status under the FLSA would have undermined the longstanding balancing approach of the economic realities test and court decisions requiring a review of the totality of the circumstances related to the employment relationship.” The Department of Labor’s goal with the withdrawal is to preserve protections for workers under the FLSA, as well as to ensure their access to benefits normally attendant in an employment relationship.
What does the withdrawal of the Rule mean for employers right now?
Well, the Trump Administration withdrew the Obama-era Administrator’s Interpretation 2015-1: The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in the Identification of Employees Who Are Misclassified as Independent Contractors. And, at this time, the Department of Labor has not issued any further or other guidance regarding the independent contractor analysis. So, for now, employers are left with applicable case law and the USDOL’s Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA), which was last revised in July 2008.
Fact Sheet 13 states that “[a]n employee, as distinguished from a person who is engaged in a business of his or her own, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves.” The Fact Sheet is clear that the U.S. Supreme Court does not establish any particular bright-line rule or test for the independent contractor classification. Instead, the determination of whether an individual is an employee or independent contractor is made based on the individual’s “total activity or situation,” applying 7 factors:
- The extent to which the services rendered are an integral part of the principal’s business.
- The permanency of the relationship.
- 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.
- The degree of independent business organization and operation.
Under this analysis, it does not matter where the work is performed, whether it is performed pursuant to a formal employment agreement, or whether it is performed pursuant to a government-issued license. Further, it does not matter how or when an individual is paid. Fact Sheet 13 identified 5 possible relationships that could create problems for businesses under this analysis: (1) construction contractors; (2) franchises; (3) volunteer services; (4) trainees/students; and, perhaps most relevantly now, (5) remote workers.
What does the withdrawal of the Rule mean for employers in the future?
Employers should expect more guidance to come at some point on this issue, especially in light of the Biden Administration’s campaign focus on “gig economy” employment issues. That guidance could very well be similar to California’s ABC Test, which President Biden espoused during his campaign as “clearer, simpler, and stronger.” California’s ABC Test states that all workers are employees, unless all of the following factors are met:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
During the campaign, President Biden promised that he would “work with Congress to establish a federal standard modeled on the ABC test for all labor, employment, and tax laws.”
Alternatively, employers could be re-confronted with an analysis similar to the Obama-era Administrator’s Interpretation 2015-1. This withdrawn Interpretation bluntly stated, at that time, that “most workers are employees under the FLSA.” It generally required a “qualitative” analysis of various factors to determine whether a worker is “economically dependent on the employer.”
Regardless of the ultimate guidance, if any, employers end up with during the Biden Administration, they should expect a more intensified enforcement focus on the independent contractor classification issue than they saw under the Trump Administration. This means they should review their existing contracts and arrangements with independent contractors to ensure they have considered whether the relationship is properly classified. If not, employers should put measures in place to strengthen the classification, or otherwise convert the worker to an employee with appropriate back pay and benefits.
Reprinted with permission from Texas Lawyer© 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or firstname.lastname@example.org.
White is a member of Winstead’s Labor & Employment Practice Group. Throughout his career in private practice, he has served as a devoted resource for employers and managers facing workplace issues in courts and conference rooms. White regularly advises employers on requirements and best practices regarding discrimination, harassment, and retaliation claims under state and federal employment laws, and he often counsels clients on a myriad of litigation avoidance strategies. When in court, White is a zealous advocate on behalf of his clients for claims of breach of contract; employment-related torts; wage and hour violations; trades secrets misappropriation; restrictive covenant breaches; discrimination, harassment and retaliation issues; and, other state and federal law issues stemming from workplace disputes.