Businesses are waiting for more clarity on which workers can be classified as independent contractors under a rule that the U.S. Department of Labor (DOL) may finalize soon—and they may be wondering what could happen to the rule under President-elect Joe Biden’s administration.
President Donald Trump’s administration will likely issue the final rule prior to Biden’s inauguration, predicted Jeffrey Brecher, an attorney with Jackson Lewis in Long Island, N.Y.
Michael Lotito, an attorney with Littler in San Francisco, also said employers can expect the Trump administration to issue a final rule.
The Biden administration may try to delay the rule’s effective date, which Lotito said is a common practice that gives the incoming administration an opportunity to review rules that are adopted at the end of a president’s term. He noted, however, that a final rule can’t be delayed indefinitely without going through a formal rulemaking process with a notice and comment period.
“If there are legal challenges brought under the Administrative Procedures Act challenging the rule, it is possible the DOL under Biden may decide not to defend the rule or find another avenue to rescind it.” Brecher said.
Economic Reality Test
The DOL issued a proposed rule on Sept. 22 that aims to clarify when workers are considered either employees under the Fair Labor Standards Act (FLSA) or independent contractors who are not covered by the FLSA. Independent contractors, including many gig-economy workers, are not eligible for minimum wage, overtime and other benefits that employees must receive.
The Society for Human Resource Management (SHRM) and other business groups have been advocating for a flexible independent-contractor standard that fits the modern workforce and generally allows the average gig-economy business to classify workers as contractors.
The proposed rule adopts an “economic reality” test to determine a worker’s classification. If finalized as proposed, the rule would make classifying workers as contractors easier, according to Rich Meneghello, an attorney with Fisher Phillips in Portland, Ore. But it would not overturn worker-friendly state independent-contractor laws, such as the one in California, he added.
Historically, whether the DOL considered someone to be an independent contractor depended on five or six factors.
Under the proposed economic reality test, the DOL would consider whether a worker is in business for himself or herself and thus is an independent contractor, or if the worker is economically dependent on an entity for work and is an employee.
In making this determination, the DOL would identify two core factors:
- The nature and degree of the worker’s control over the work.
- The worker’s opportunity for profit or loss based on initiative or investment.
It also would identify three other factors that may serve as additional guides in the analysis:
- 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.
But the two core factors are entitled to greater weight than the other factors, the DOL noted.
Broader Definition of ‘Employee’
Previous guidance from 2015 under former President Barack Obama’s administration called for a narrower view of what was considered an independent contractor, which would result in most workers being classified as employees.
Biden’s administration may focus on expanding the definition of “employee” as much as possible, noted Brett Coburn, an attorney at Alston & Bird in Atlanta.
The president-elect supports the Protecting the Right to Organize (PRO) Act, which, among other changes, would make it harder to classify workers as independent contractors by adopting an “ABC” test.
But whether the U.S. Senate takes up the PRO Act will likely depend on the outcome of Georgia’s Senate races. The incoming Senate is split at 50-48 in Republicans’ favor. Two races in Georgia are scheduled for a runoff on Jan. 5.
“So much depends on the outcome to see whether the PRO Act will even get a hearing in the Senate, let alone get on the floor,” Lotito said.
Under the PRO Act, workers would be classified as employees unless:
- A: 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.
- B: The worker performs tasks that are outside the usual course of the hiring entity’s business.
- C: The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.
Biden’s campaign website said that employee 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.” Biden also wants to ensure that gig workers receive employment benefits and protections.
Review State Law
Some states have stricter standards for classifying workers as independent contractors. For instance, California follows the ABC test that Biden supports. Biden’s campaign called California’s standard a “clearer, simpler and stronger” test that distinguishes employees from independent contractors. “The ABC test will mean many more workers will get the legal protections and benefits they rightfully should receive,” according to his campaign website.
Lotito noted, however, that California’s test has faced pushback from residents. For instance, many freelance journalists lobbied to be exempt from the standard. Lawmakers responded by enacting AB 2257, which sets less-stringent criteria for freelancers. Those who meet the new criteria will be evaluated under the Borello test, which predates the ABC test and involves a multifactor analysis that primarily focuses on who exerts control over the work.
Additionally, California voters recently approved Proposition 22, which allows gig-economy companies to continue classifying app-based drivers in the state as independent contractors while also requiring businesses to provide some benefits to workers.
“Workplace flexibility is key,” Lotito said. “People want to be able to make informed choices about how they work.”