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DOL Debuts Rule Easing Business Use of Independent Contractors (1)

Proposal addresses contractor status under federal law

  • DOL aims to shield businesses from misclassification claims

Businesses will gain a simpler framework for classifying workers as independent contractors under a high-stakes regulatory proposal the Labor Department released, representing the Trump administration’s response to blue-state efforts to expand the scope of employee status.

The proposed regulation, unveiled Tuesday, provides a model for when businesses may legally classify workers as independent contractors rather than employees, who are covered by federal minimum wage and overtime law. The DOL is proposing a more employer-friendly interpretation of employee status under the Fair Labor Standards Act than it applied during the Obama administration.

The issue of worker classification has taken on greater significance amid the rise of the gig economy, where independent contractors are central to the business models of leading companies such as Uber Technologies Inc., Lyft Inc., and Instacart.

The proposed rule adopts an “economic reality” test for determining which workers qualify as independent contractors. It explains that contractors must be in business for themselves, rather than being economically dependent on the possible employer for work. The rule explains the “inquiry into economic dependence is conducted through application of several factors, with no one factor being dispositive, and that actual practices are entitled to greater weight than what may be contractually or theoretically possible,” according to the DOL’s Wage and Hour Division rule. DOL proposes narrowing this test into five factors, less than the number used by various courts and previously used by DOL.

The agency proposed giving greater weight to two core factors as determinative of status: the nature and degree of the employer’s control over the work and the worker’s opportunity for profit or loss based on personal initiative or investment. They’re complemented by three additional “guideposts,” which would be useful in the analysis when the initial two core factors are conflicting, a senior DOL official said on a media call Tuesday. Those three criteria are the amount of skill required in the work, the degree of permanence in the work relationship, and whether the work is part of an integrated unit of production.

The proposal will be subject to a 30-day comment period once it’s published in the Federal Register in the coming days. That’s shorter than the typical 60- or 90-day period for the public to weigh in on economically significant rulemakings, indicating the administration is fast-tracking the rule to finalization.

“The Department’s proposal aims to bring clarity and consistency to the determination of who’s an independent contractor under the Fair Labor Standards Act,” said Labor Secretary Eugene Scalia in an accompanying statement. “Once finalized, it will make it easier to identify employees covered by the Act, while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.” Trump Priority DOL’s proposal seeks to offer businesses clarity on a contested area of employment law and hence protection from a wave of worker lawsuits that have accused companies in the gig economy and in multiple other industries of shorting workers on pay by improperly designating them as contractors.

Some attorneys on both sides of the management-labor divide have questioned how persuasive the rule could be with federal judges, who consider a range of legal tests for drawing the line between employee and contractor.

A senior DOL official on the press call acknowledged federal judges may opt not to give deference to this rule, once finalized. The official added, “We do believe that the way we have articulated it is going to be highly persuasive to courts and to businesses and to individuals who want to be independent contractors across the country.”

DOL leadership has made it a priority to finalize the regulation before the end of President Donald Trump‘s term on Jan. 20—applying a timeline that is unusually short for a rule that would have ramifications throughout the economy. DOL brass and other administration officials consider the rulemaking as an opportunity to solidify Trump’s workplace policy legacy by responding to efforts certain Democratic-run states have made to widen the legal definition of an employee.

California’s Assembly Bill 5, which took effect in January, applied a rigid three-part test for determining when a worker can be classified as an independent contractor. The law, which has been challenged in court by gig economy companies, truckers, and freelance journalists, generally designates workers as employees if they’re doing work that isn’t outside the usual course of a company’s business.

New York and Illinois legislators have expressed interest in passing similar legislation. The so-called “ABC test” codified under A.B. 5 is already the standard in Massachusetts, New Jersey, and Connecticut. Uber, Lyft, DoorDash, Instacart, and Postmates have backed a ballot initiative in California this fall that will give voters a chance to exempt gig drivers from A.B. 5.

Business groups and Republicans cite varying court interpretations and state laws to argue that employers need a clear federal test to determine worker status, and that compelling companies to reclassify workers as employees would force some to shutter due to increased costs.

Unions and Democrats favor expanding employee status, contending that workers are often misclassified as independent contractors, which allows companies to dictate workers’ economic conditions while denying them basic workplace protections. Altering Obama’s Approach The Obama administration actively enforced contractor misclassification but didn’t pursue a regulation because the DOL’s Office of the Solicitor concluded at the time that it was up to Congress to pass legislation interpreting employee status under the FLSA and for courts to set boundaries through case law.

Instead, the Obama DOL issued guidance outlining a wide interpretation under the law. That guidance, known as an administrator’s interpretation, was withdrawn in 2017 by Trump’s first labor secretary, Alexander Acosta, who removed the document because he said it sidestepped the public notice-and-comment process for regulations. The administration has since been pressured by business lobbyists to weigh in with a new approach to worker status. Acosta suggested in late 2017, however, that Congress should play the lead role in filling this void.

The Labor Department eventually issued an opinion letter last year that interpreted the law in favor of a company’s decision to treat its workers as independent contractors, but that guidance has limited applicability and wouldn’t receive as much judicial deference as a regulation.

Meanwhile, expanding employee status has gained traction in some states during the Trump administration. And in February, the Democratic-majority House passed a sweeping labor bill that would incorporate an ABC test for determining when workers must be considered employees covered by federal collective bargaining and union organizing law. Election Looms Large Election-year political considerations and lobbying from the business community are the motivating factors behind DOL leadership’s mission to fast-track the regulation before a potential transfer of power.

Still, internal discord at DOL over the rule’s legality stalled the proposal’s release. That has prompted some business leaders to caution the administration that it may be wiser to shelve the rulemaking before it is finalized if Trump loses his re-election bid in November.

Finalizing the rule would become particularly risky, some management lawyers say, if the Senate were to flip to Democratic control. That outcome would allow Democrats to undo the rule—and any similar future effort—via the Congressional Review Act. (Updated with rule context in 5th and 7th graphs, and Labor Department comment in 10th graph. )

To contact the reporter on this story: Ben Penn in Washington at bpenn@bloomberglaw.com To contact the editors responsible for this story: John Lauinger at jlauinger@bloomberglaw.com; Jay-Anne B. Casuga at jcasuga@bloomberglaw.com

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