Employee or independent contractor? DOL publishes new rule seeking reclassification

The U.S. Department of Labor (DOL) issued a new proposal recently on whether workers under the 1938 Fair Labor Standards Act (FLSA) should be classified as employees or independent contractors. 

The Biden Administration proposal would rescind the current rule put into effect in January 2021 by the Trump Administration, which it argues did not comply with the FLSA and the decades of judicial precedent applying it. The DOL asserts that under the Trump Administration thousands of workers were misclassified as contractors instead of employees. 

“Frankly, we aren’t surprised to see the Biden Administration’s Department of Labor rescind the Trump-era independent contractor rule and replace it with a test that favors more workers being classified as employees rather than independent contractors,” Jill S. Welch, partner and chair of Lancaster-based Barley Snyder’s Employment Practice Group, wrote in an email response. 

Welch counsels companies in handling workplace challenges and helps clients resolve disputes, claims, cases, and litigation in aspects of labor and employment law.  

What many were waiting to see regarding the proposed DOL rule, she wrote, was if it would mirror the “ABC test” used in states such as California and New Jersey. She called it “a very employee-friendly test that makes it more difficult to support independent contractor status” and noted that President Biden during his campaign indicated support for the ABC test.

Welch said the proposed DOL rule does not adopt the ABC test.  What it does is set forth a six-factor economic realities test to determine whether a worker is an employee or an independent contractor under wage and hour laws.  “This is not new or ground-breaking here in Pennsylvania,” she wrote. “Pennsylvania courts have been using these economic realities test for decades, most recently in cases involving Uber drivers.” 

Welch outlined the six-factor economic realities test utilized by courts in Pennsylvania, which is similar to the proposed DOL rule: 

1) the degree of the alleged employer’s right to control the manner in which the work is to be performed; 

2) the alleged employee’s opportunity for profit or loss depending upon his managerial skill; 

3) the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers; 

4) whether the service rendered required a special skill; 

5) the degree of permanence of the working relationship; and 

6) whether the service rendered is an integral part of the alleged employer’s business. 

“No single factor is determinative – courts look to the totality of the circumstances, as will the DOL,” wrote Welch.  “The ‘right to control factor’ is highly relevant, though, and we expect to see comments on whether the employer needs to exercise actual control, or merely have the right to control the work.  In the end, these factors should answer the seemingly straightforward question:  is the worker in business for him or herself or is the worker economically dependent on the potential employer for work.  

“The use of technology and the gig economy, which afford companies and workers a greater degree of independence and flexibility than the traditional manufacturing work model (prevalent when the FLSA was first enacted), have made the analysis more difficult.” 

The new regulations proposed by the Biden Administration are aimed at replacing the previous rule for classifying employees as contractors, workers not covered by federal minimum wage laws, and not entitled to benefits such as health care and paid sick days. 

“While independent contractors have an important role in our economy, we have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation’s most vulnerable workers,” Secretary of Labor Marty Walsh said in a prepared statement. 

The DOL proposal seeks consistency with decades of case law employers have used to properly classify workers as employees or independent contractors under the FLSA. It also looks to reinstate comprehensive analysis to determine a worker’s status under the FLSA, and that the analysis does not favor any single economic reality factor or factors. 

“The Trump-era rule would have elevated two factors over the others: (1) the nature and degree of control over the work; and (2) the worker’s opportunity for profit or loss,” Welch wrote. “A reason the current DOL proposes rescinding this prior rule is that it conflicts with the tests used by the majority of courts, creating confusion and unpredictability and expense for companies and workers as cases grappling with the new rule would slowly wind their way through courts.” 

The DOL’s Wage and Hour Division reviewed feedback solicited last summer from stakeholders prior to publishing its Notice of Proposed Rulemaking on Oct. 13. Stakeholders can continue to submit comments during a 45-day period which ends Nov. 28. 

Welch wrote that as a reminder, “other agencies such as the IRS, and other states such as California and New Jersey, have their own independent contractor tests and factors.  So, companies and workers need to distill all of these tests depending on where they are located to reach the answer to that seemingly simple question – is the worker in business for him or herself.”