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Independent Contractor Law Update:  New DOL Final Rule Announced

EverythingHR Staff | 01/13/2021 | Blog, Featured

Perhaps destined to be filed under “Thank You, Next…” on January 6th, the Department of Labor announced a final rule clarifying the standard for employee versus independent contractor determination under the Fair Labor Standards Act (FLSA). The first clue as to its potential lack of permanence is its effective date of March 8, 2021.

The new rule codifies (and essentially ever so slightly reimagines) the “economic reality” test which has been adopted in various forms numerous times over the years.  It is pretty much identical to the proposed version the DOL announced in September.  In general, the economic reality test is a multi-factor test that focuses on whether the worker is dependent on the employer (an employee) or is in business for themself (an independent contractor).

Given the timing and the nature of the announcement of the new rule, there are several important considerations for employers:

  • Will this survive the Biden administration long enough to even go into effect? It is unclear what the approach might be of Labor Secretary nominee Marty Walsh; however, it would be logical to expect some kind of push back given the significance of the new rule.
  • What about tests used by other federal agencies, such as the IRS, as well as tests used under other federal laws?  Regardless of the future of the new rule, employers should always be mindful of these.
  • What does this mean for employers in states such as California? Probably nothing.  California’s AB5 restrictions spelled out under the ABC test are not going away any time soon.  In fact, it would not be shocking to see some of the CA guidelines incorporated into federal law.

Please click through to our blog for more details on the DOL’s final rule.  It will be critical for all employers to follow this issue as it will definitely be at the forefront of federal and state employment laws for a long time still.

DOL Finalizes Independent Contractor Rule, but More Change May Be on the Way

The announcement of a new final rule addressing when workers can legally be classified as independent contractors emphasizes the U.S. Department of Labor’s (DOL) intent to bring clarity to the issue, but with a change in administration near, the future of the rule is up in the air.

The final rule, announced January 6, is slated to take effect on March 8. It doesn’t make major changes to the current standard for determining when workers can be classified as independent contractors instead of employees, but it is seen as making it easier to justify an independent contractor classification. The use of independent contractors can be attractive since businesses don’t pay employment taxes on contractors or provide them with benefits.

Future of rule uncertain

Burton J. Fishman, an attorney with FortneyScott in Washington, D.C., says the incoming Biden administration would be able to freeze the rule before its effective date. Another option for change would be to use the Congressional Review Act (CRA), which allows Congress to review new regulations and rescind them.

Using the CRA, however, would be a “double-edged sword,” Fishman says, since the law would prohibit the new administration from reregulating in that area in the same or similar manner. Since the Biden administration wants to change the rule, it’s unlikely to try to rescind it under the CRA.

Fishman says he expects a Biden administration rule to reflect the ABC rule, which makes it much harder to justify an independent contractor classification.

As the newly finalized rule stands now, it includes two “core factors” examining the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss. The more control workers have, the more likely they are to be legally classified as contractors under the new rule.

The rule also includes three other factors: the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the potential employer, and whether the work is part of an integrated unit of production.

Risks of contractor classification

Jodi R. Bohr, an attorney with Tiffany & Bosco, P.A. in Phoenix, Arizona, says the new rule “only slightly” restates the factors currently outlined in the DOL’s Fact Sheet 13, Employment Relationship Under the Fair Labor Standards Act (FLSA).

“The revised factors have not been adopted by the courts, and they are not intended to change the economic realities test currently used,” Bohr says. “Instead, the factors are meant to provide additional clarity to employers and emphasize certain factors within the test.”

Even though the rule seems to look favorably on an independent contractor classification, Bohr says employers seeking to use contractors should do so carefully.

“With the change to the Biden administration, the DOL’s interpretation will be strictly construed in favor of a classification of employee instead of independent contractor,” Bohr says, adding that companies should ask themselves this question: “Is this individual properly classified under the current factors?” If the answer is no, a correction should be made swiftly, and the company should work with counsel to determine potential liability for the previous improper classification.

In her experience defending clients under DOL scrutiny over the last year, Bohr says “DOL investigators have mentioned that the result would likely have been more severe under the Biden administration and to keep an eye out for more of these investigations in 2021.”

Bohr says she has recently seen the DOL “come down hard on employers who it felt improperly classified employees as independent contractors.” In a January 2021 article for Arizona Employment Law Letter, she noted “contradictory actions” coming out of the DOL.

In the DOL’s efforts to investigate wage and hour practices, Bohr’s article says the agency seemed to focus on companies using independent contractors as part of their workforce, “all the while seemingly revising regulations to make it easier for businesses to classify workers as independent contractors.”

State laws also apply

In addition to complying with any new federal rule, businesses need to keep state laws in mind. For example, California law uses the ABC test to determine if workers can be properly classified as independent contractors instead of employees.

Cathleen S. Yonahara, an attorney with Freeland Cooper & Foreman LLP in San Francisco, says in spite of the new rule, businesses in California “should tread carefully.”

“The ABC test is remarkably different from the federal rule,” Yonahara says. She explains that under the ABC test, a person will be considered an employee instead of an independent contractor unless the hiring entity demonstrates that all the following conditions are satisfied. The worker must:

  • (A) Be free from the company’s control and direction in connection with the performance of the work;
  • (B) Perform work that is outside the usual course of the hiring entity’s business; and
  • (C)  Be customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Yonahara says the B prong of the ABC rule is the most problematic factor and has forced California employers to reclassify numerous workers as employees.

Article provided by content partner BLR.  Author Tammy Binford writes and edits news alerts and newsletter articles on labor and employment law topics for BLR web and print publications.