The DOL’s just-issued final rule on employee vs. independent contractor classifications under the FLSA seems likely to be reversed. On January 20, the White House issued a memorandum to the heads of all executive departments and agencies ordering them to halt all non-emergency rulemaking and regulatory activity issued under the previous administration pending review by the new administration.
Regulatory Freeze Chills the Trump DOL’s Independent Contractor Rules
The memorandum instructs the executive agencies, which include the U.S. Department of Labor, to immediately:
- Halt the proposal or issuance of any rule until a department or agency head appointed or designated by President Biden reviews and approves the rule;
- Withdraw any rules already sent to the Office of the Federal Register (OFR) for publication but which have not yet been published; and
- 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.”
Accordingly, the DOL’s final rules issued on January 7, including those regarding independent contractor classification, are effectively withdrawn.
The classification rules issued under the Trump DOL took a business-friendly approach. They focused on whether workers are economically dependent on another business–making them more likely to be an employee of that business, and entitled to the minimum wage and overtime under the Fair Labor Standards Act (FLSA)–or are economically independent, making them true independent contractors. (For more on the January 7 final rules, click here.) By adopting an “economic reality” test, the January 7 rules effectively simplified the classification test used by the DOL to determine whether a worker is an independent contractor or an employee to two “core factors”—the nature and degree of control over the work and the worker’s opportunity for profit or loss based on initiative and/or investment. DOL’s January 7 final rule was widely viewed as including more workers in the independent contractor side of the equation.
A Federal ABC Test?
However, this reversal comes as no surprise given Biden’s stated priorities to protect workers in the gig economy. In his “Plan for Strengthening Worker Organizing, Collective Bargaining and Unions,” Biden promises to “work with Congress to establish a federal standard modeled on the ABC test for all labor, employment, and tax laws.” The ABC test (used in California and several other states, more here) is a more rigid test for determining worker status. Under the ABC test, a worker is presumed to be an employee unless a hiring entity can establish all three of the following conditions:
- That 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;
- That the worker performs work that is outside the usual course of the hiring entity’s business; and
- That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
It’s safe to say we will see more worker-protective interpretations of employee status during the Biden era (see more here). As such, we recommend working with counsel to perform a classification audit to review service provider agreements and ensure compliance.