Department of Labor Submits New Proposal for Independent Contractor Classification

UPDATE (March 10, 2021)— The U.S. Department of Labor (DOL) recently submitted a proposal for a new rule for determining the status of a worker as an independent contractor or an employee. The independent contractor rule that was finalized under the previous administration has had its effective date delayed 60 days to May 7, 2021, and will likely be either modified or replaced before it can take effect.

While details of the new rule are currently unavailable to the public, it is expected that it will be modeled after the “ABC test” California currently uses to distinguish employees from full-time contractors. The Biden administration has publically voiced support for the “ABC test” in the past, saying in a statement on joebiden.com that workers need to be protected from misclassification.

“This epidemic of misclassification is made possible by ambiguous legal tests that give too much discretion to employers, too little protection to workers, and too little direction to government agencies and courts,” reads the statement. “States like California have already paved the way by adopting a clearer, simpler, and stronger three-prong “ABC test” to distinguish employees from independent contractors.”

Under the “ABC test”, a worker can only be classified as an independent contractor if:

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

Details of the new rule proposal will become available once the proposal has been cleared by the White House. At that point, the Department of Labor will be able to seek comments from the public on whether the current rule should be modified or repealed entirely and then move forward with the legislative process.

Read on below for our previous coverage of this topic.

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White House Delays Independent Contractor Rule

(January 28, 2021)— On the day of the presidential inauguration, the newly-minted Biden administration released a memorandum requesting the halt of all non-emergency rule-making and regulatory activity issued under the previous administration. As a result, the recently finalized rule for clarifying the status of a worker as an independent contractor or employee has been delayed, likely indefinitely.

This delay was expected and a normal part of the natural transition of power between two presidential administrations. The regulatory freeze requests that executive agencies:

• Wait to propose or issue any rules until a department or agency head appointed by President Biden has the opportunity to review and approve the rule;
• Withdraw immediately any rules that have been sent to the Office of the Federal Register but not published in the Federal Register;
• Consider postponing by 60 days the effective date of any such rules already sent to OFR for publication (or otherwise issued) but which have not yet taken effect, “for the purpose of reviewing any questions of fact, law, and policy the rules may raise.”

Some institutions, like the National Association of Home Builders, remain hopeful that the new independent contractor rule will still see the light of day.

“NAHB believes the final independent contractor rule represents a positive step forward that would provide more clarity for employers to determine whether a worker is an independent contractor or an employee under the Fair Labor Standards Act,” the association said in a statement.

Other sources, including the National Law Review and Lexology, view the delaying of the rule as confirmation it will be withdrawn. President Biden has made his stance on worker classification clear. As part of his “Empower Workers” platform, Biden says he intends to “aggressively pursue employers who violate labor laws, participate in wage theft, or cheat on their taxes by intentionally misclassifying employees as independent contractors.”

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DoL Finalizes Independent Contractor Classification Rule

January 14, 2021— Last week the U.S. Department of Labor announced a final rule for clarifying whether a worker is an independent contractor or an employee. The rule, which comes at the end of a long legal process, is meant to simplify and streamline the procedure of classifying workers.

“This rule brings long-needed clarity for American workers and employers,” said U.S. Secretary of Labor Eugene Scalia. “Sharpening the test to determine who is an independent contractor under the Fair Labor Standards Act makes it easier to identify employees covered by the Act, while recognizing and respecting the entrepreneurial spirit of workers who choose to pursue the freedom associated with being an independent contractor.”

The question of whether a worker is an employee or an independent contractor has grown increasingly important over the last few years. The answer carries ramifications not just for the construction industry, which relies on efficient and productive relationships between contractors and independent subcontractors, but also for rapidly growing gig-economy industries like ride-sharing and food delivery services. Those workforces are made up almost entirely of independent contractors.

The final rule provides context for an “economic realities test” used to clarify a worker’s status. This test is based around five main factors to determine whether a worker is in business for him or herself, or if they are economically dependent on their employer for work.

Two “core factors” are meant to provide the most weight in the determination. They are:

• The nature and control of one’s work;
• The worker’s opportunity for profit or loss based on initiative and/or investment.

The rule also provides three other factors as “additional guideposts” in the determination, especially if the two core factors are inconclusive. Those factors are:

• 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.

The rule also provides six examples of those factors being applied, and clarifies that “the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.”

According to DoL Wage and Hour Division Administrator Cheryl Stanton, “Streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility. The rule we announced today continues our work to simplify the compliance landscape for businesses and to improve conditions for workers. The real-life examples included in the rule provide even greater clarity for the workforce.”

The final rule was published in the Federal Registrar on January 7 and is scheduled to go into effect March 8. However, it is widely expected the rule will be opposed by the incoming Biden administration, due to concerns that it gives employers too much power and enables corporations to take advantage of worker classification.