The saga continues for companies that rely on a gig-economy business model as the feds just challenged a court order that recently reinstated a Trump-era rule that makes it easier to classify workers as independent contractors. On May 13, the Department of Labor (DOL) filed a notice of appeal with the Texas federal district court which reinstated the rule. In 2021, the Biden administration first delayed and then eventually withdrew the rule. But the DOL did not give the public a meaningful opportunity to comment on its decision to delay the Trump administration’s rule or consider possible alternatives before overturning it, according to the March 14 district court order. . For now, the Trump-era rule remains in effect — but that could change in the blink of an eye as the lawsuit progresses through the courts. What do you need to know as the litigation unfolds?
Business groups back ‘economic realities’ test
Two competing schools of thought have emerged as to the proper legal standard for determining whether workers are independent contractors or employees. The Trump administration’s rule looks at the “economic reality” of every employment relationship by weighing five simple factors and determining whether the worker is in business for themselves (and therefore a contractor) or economically dependent on the hiring entity (and therefore an employee):
- The nature and degree of individual control over the work;
- The possibility of profit or loss for the individual;
- The amount of skill required for the job;
- The degree of permanence of the employment relationship; and
- If the work is part of an integrated production unit.
Although the list is not exhaustive and no single factor is decisive, the first two points are identified as the “essential factors” in the analysis and therefore carry more weight than any other factor. Thus, if the economic realities test applies and the first two factors are both in favor of one status or the other (employee or entrepreneur), the remaining factors will not be relevant in most cases. under the Federal Fair Labor Standards Act (FLSA).
The Trump administration has noted that when assessing the individual’s economic dependence on the potential employer, “the actual practice of the parties involved” is more relevant than what may be contractually or theoretically. possible. For example, an individual’s theoretical abilities to negotiate prices or work for competing companies are less meaningful if, in practice, they are prevented from exercising these rights.
The final rule applying this flexible test was due to take effect in March 2021, but the DOL first announced a 60-day regulatory freeze shortly after President Biden took office. Then, on March 11, 2021, the department formally announced that it believed the Trump-era rule was inconsistent with the standards set by the Supreme Court and the overall purpose of federal wage and hour law. He shelved this proposal and said he would make his own rule.
The business coalition challenging the actions of the Biden administration argued that the DOL violated the Administrative Procedure Act by failing to provide meaningful process or substantial justification for its decision to delay and then drop the rule.
The U.S. District Court for the Eastern District of Texas agreed and recently reinstated the Trump administration rule with its original effective date of March 8, 2021. It is that ruling that is now under attack by the current DOL. .
Unions and worker advocates back ‘ABC’ test
Although the current administration has yet to come up with its own new rule on independent contractors, President Biden has made it clear during his campaign that he supports a three-pronged California-style “ABC” test. A worker is considered an employee under the ABC test unless the hiring entity establishes these three prongs:
- The Worker is free from the control and direction of the Lessee in connection with the performance of the work, both under the contract for the performance of such work and in fact;
- The worker performs work that is not part of the normal course of business of the hiring entity; and
- The worker is usually engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.
In California, the ABC test expanded the definition of “employee” in state wage decrees – as well as some other laws – and placed a positive burden on companies to prove that independent contractors are properly classified.
The ABC test makes it much harder for many companies to treat workers in California as independent contractors, and harder for companies to hire smaller, entrepreneurial companies. Even so, President Biden has promised to work with Congress to establish a federal standard modeled after the ABC test for all labor, employment, and tax laws. Additionally, Labor Secretary Marty Walsh said he believes construction workers should be classified as employees.
The 5th United States Circuit Court of Appeals will now consider the DOL’s challenge to the district court’s decision reinstating the economic realities test. In the meantime, you should note that many states apply their own test to determine whether workers are independent contractors or employees under wage and hour laws. For example, California, New Jersey, Massachusetts, and other states have their own systems in place that make it harder for companies to use contract labor for many jobs within their organization. .
You should also recognize that at the federal level, the National Labor Relations Board and other agencies may apply different tests than those used by the DOL for FLSA cases. In fact, the NLRB has announced plans to develop its own standard sometime in 2022, which will no doubt complicate matters further.