Federal Judge Reinstates Trump-Era Independent-Contractor Rule

A rule that would make it easier for employers to classify workers as independent contractors rather than employees has been revived by a federal judge in Texas—but the Department of Labor (DOL) may appeal the decision.

Under the Fair Labor Standards Act (FLSA), employees are entitled to minimum wage, overtime pay and other benefits. Independent contractors are not entitled to such benefits, but they generally have more flexibility to set their own schedules and work for multiple companies.

During President Donald Trump's administration, the DOL issued a final rule clarifying when workers are independent contractors versus employees. The rule applied an economic-reality test that primarily considers whether the worker operates his or her own business or is economically dependent on the hiring entity.

The standard was slated to take effect in March 2021, but President Joe Biden's administration issued rules delaying and ultimately withdrawing the standard.

Judge Marcia Crone of the U.S. District Court for the Eastern District of Texas reinstated the Trump administration's rule in a March 14 order, finding that the Biden administration's actions violated the Administrative Procedure Act (APA).

No Meaningful Opportunity to Comment

Crone sided with the Coalition for Workforce Innovation, a group that represents Uber, Lyft and other gig-economy businesses that rely on an independent-contractor business model. Along with several other business groups, the coalition sued the DOL, claiming that the Biden administration failed to engage in a proper notice and comment period as is required by the APA.

Crone agreed with the business groups that the DOL didn't provide the public with a meaningful opportunity to comment, because the notice-and-comment period for the "delay rule" was only 19 days. "Although the APA does not mandate the minimum number of days necessary for adequate comment, circumstances warranting a comment period of less than 30 days are rare and generally require good cause," she said.

The court also found that the "withdrawal rule" was arbitrary and capricious because the DOL failed to consider potential alternatives to rescinding the Trump-era rule. The Trump administration sought to clarify the definition of "independent contractor" under the FLSA, because federal courts applied the economic-reality test inconsistently, Crone noted.

(Bloomberg Law)

Clarity for Employers

"The decision brings welcome clarity to businesses and others seeking guidance and transparency as to how the DOL would analyze the question of whether a given worker was an independent contractor or an 'employee' under the FLSA (thus entitled to, among other things, minimum wage and overtime)," said law firm Littler Mendelson. "It is unclear whether the department will appeal this decision, as well as whether it will engage in new rulemaking to propose a new independent-contractor standard."

(Littler Mendelson)

Economic-Reality Test

The DOL has traditionally analyzed a number of factors to consider whether a worker is an independent contractor or employee and looked at "the totality of the circumstances." The withdrawn rule would have applied a more-limited economic-reality test to determine whether workers are independent contractors or employees and would have primarily considered the following factors:

• The nature and degree of control over the work.
• The worker's opportunity for profit or loss based on initiative and investment.

Three other factors would have served as guideposts in determining employment status:

• The amount of skill required for the work.
• The degree of permanence of the working relationship between the worker and the potential employer.
• Whether the work is part of an integrated unit of production (or the individual works under circumstances analogous to a production line).

"The rule's prioritization of 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," according to the Biden administration's announcement withdrawing the rule.

(SHRM Online) and (U.S. Department of Labor)

The 'ABC' Test

Although the DOL hasn't created a new test, Biden has said he supports an "ABC" test similar to California's independent-contractor rule. With some exceptions, California requires all three of the following factors to be met for a worker to be properly classified as an independent contractor:

• The worker is free from the control and direction of the hiring entity in connection with the performance of the work.
• The worker performs tasks that are outside the usual course of the hiring entity's business.
• The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

Other states, such as Illinois, Massachusetts and New Jersey, apply a similarly stringent test.

(SHRM Online)