The U.S. Department of Labor’s (DOL) decision to withdraw the independent contractor rule developed during the previous administration means businesses looking forward to an easier justification of contractor status need to think again.
The DOL’s withdrawal of the rule became effective May 6. The rule, which was finalized late in the Trump administration, was originally set to take effect March 6, 2021, but the incoming Biden administration was able to freeze it and delay its effective date since it had not yet taken effect when the new administration began.
Catherine F. Burgett, an attorney with Frost Brown Todd LLC in Columbus, Ohio, says the withdrawal puts employers “back to where they’ve always been—in a place where an individual’s classification should be carefully considered.”
Although the rule had the potential to make it easier to classify workers as independent contractors, it “had not been road-tested,” Burgett says, and that was one of the DOL’s objections to it.
“From a practical standpoint, any employer should be careful when making a determination as to whether an individual is an employee or an independent contractor, regardless of the rule being used,” Burgett says.
Burgett also notes the DOL’s rule is only one of the rules employers must consider when determining whether a worker can be classified as an independent contractor instead of an employee.
Employers not only need to consider the DOL’s rule, which relates to worker classification under the Fair Labor Standards Act (FLSA), but they also must examine the National Labor Relations Board’s (NLRB) rule related to classification under the National Labor Relations Act (NLRA). In addition, the IRS has its rule on the subject, and states have their own rules related to classification as well.
“The overlay and interplay of these rules can make it very difficult to structure independent contractor relationships,” Burgett says.
As to what the DOL will do next, Burgett says new rulemaking is always a possibility, but so is increased attention to enforcement. A new rule might incorporate the restrictive ABC test for determining when a worker can legally be classified as a contractor instead of an employee.
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 met. 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.
Andrew B. Murphy, an attorney with Faegre Drinker in Minneapolis, Minnesota, says a new rule would take months to develop and work through the administrative process. Plus, he says a new rule would likely be challenged in court. For example, he says, a rule adopting the ABC test “would upend decades of past practice, including U.S. Supreme Court precedent.”
Burton J. Fishman, an attorney with FortneyScott in Washington, D.C., says the withdrawal of the rule was a much-anticipated step, and it is widely rumored that David Weil, who directed the DOL’s Wage and Hour Division during the Obama administration, is going to be called back. If that’s the case, employers should carefully review Weil’s advisory opinion on the subject, which was blocked by a court, as a template for future action.
“Weil believes that the ‘default’ position for workers is ‘employee,’ and many elements of the ABC test fit his views,” Fishman says.
Advice for Employers
Fishman advises employers using contractors to reexamine their workforce, looking at independent contractors and joint employees to see how their arrangements would do under Weil’s prior advisory opinion. He also says employers should prepare for legal battles since contractor status under Weil would be subject to routine challenge.
Murphy advises employers to “continue on a moderate path,” meaning they should use the time before any new rule can be finalized to make sure their contractor relationships are appropriate, not only in terms of what is theoretically possible under a contract but also how the worker is actually performing services.
Burgett also advises careful review of contractor arrangements. “Given the various rules at play, the focus on enforcement we’ve seen at all levels of government, and the number of individuals potentially impacted, any employer who uses independent contractors should carefully review those relationships with an eye toward structuring the relationship in such a way to survive a challenge—whether by the government or the individual,” she says.
“To the extent employers were hopeful that it would become easier to provide individuals the flexibility many workers seem to want through the form of an independent contractor arrangement, those hopes may have just been dashed,” Burgett says.
Tammy Binford writes and edits news alerts and newsletter articles on labor and employment law topics for BLR web and print publications.