Labor Department Officially Delays Independent-Contractor Rule

The U.S. Department of Labor (DOL) has delayed a final rule clarifying who is an independent contractor versus an employee under the Fair Labor Standards Act (FLSA). 

Rich Meneghello, an attorney with Fisher Phillips in Portland, Ore., said the move is not surprising. The prior administration issued the final rule in January, and it was slated to take effect on March 8. However, the new administration asked federal agencies to freeze pending regulations to give new leaders time to review them.

The independent-contractor rule has officially been delayed for 60 days. "The delay is to really buy the DOL some time," noted James Plunkett, an attorney with Ogletree Deakins in Washington, D.C.

The department could allow the final rule to take effect on May 7, after the new administration has a chance to review it. Meneghello said, however, that this is unlikely to happen in light of President Joe Biden's statements on the campaign trail. For instance, Biden pledged to work with Congress to establish a federal standard similar to California's stringent "ABC" test for classifying workers as independent contractors.

Plunkett expects that between now and the new effective date, there will be a proposal to do something further with the rule. "They could propose to rescind it altogether or amend it," he said.

Meneghello noted that the DOL may withdraw the rule and announce that the department is working on a new rule. Biden's pick for secretary of labor, Boston Mayor Marty Walsh, is still pending Senate confirmation, so the DOL may wait until Walsh is on board to develop and propose a new rule.

Different Tests

The distinction between employees and independent contractors is significant. 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.

The delayed federal rule would apply an economic-reality test to determine whether workers are independent contractors or employees and would primarily consider 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 may serve 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).

"There is a good possibility that the regulations will be amended or potentially rescinded altogether," said Jesse Jauregui, an attorney with Alston & Bird in Los Angeles. He noted that Biden's administration may focus on a framework that broadly defines the employee-employer relationship.

The president supports the Protecting the Right to Organize (PRO) Act, which, among other changes, would adopt an "ABC" test similar California's rule. 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 independent-contractor test.

Jauregui noted that the federal rule applies only to the DOL's interpretation of the FLSA and does not pre-empt state law. "So differing definitions and applications will continue to populate this landscape."

On the Horizon

Meneghello doesn't think the current Senate will make legislative changes to the independent-contractor standard. Instead, he said, employers might expect to see more regulatory action from the DOL and changes at the state level.

Some states may follow California by broadly including as many workers as possible under the definition of "employee," while other states may clarify that some workers, such as those in the gig economy, are properly classified as independent contractors.  

"Keep an eye out for litigation," Meneghello said, noting that business groups may challenge the DOL's decision if the department withdraws the prior administration's rule.

Jauregui expects litigation to continue about whether gig-economy companies are employers or technology platform providers that connect drivers and passengers.

"With the DOL's final rule now in limbo, it is especially important for employers to consult with legal counsel to determine whether an individual is likely to be considered an independent contractor or an employee for purposes of the FLSA," said Steven Pockrass, an attorney with Ogletree Deakins in Indianapolis.

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