HR Tip: DOL rule makes it harder to classify workers as independent contractors

In the seemingly never-ending debate about what constitutes an employee versus an independent contractor, the pendulum has swung in favor of an employee-friendly analysis. The Department of Labor (DOL) released a final rule changing how it determines whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The rule makes it harder for companies to classify workers as independent contractors by rescinding a Trump-era contractor test that gave greater weight to two factors - how much control workers have over their job duties and their opportunities for profit or loss - in determining whether they were contractors or employees.

Under the new rule, the worker classification analysis returns to the long-used "totality of the circumstances" standard with each factor in the legal test used to determine worker status under the FLSA considered equally. These include:

• A worker's opportunity for profit or loss.
• Investments by the worker and potential employer.
• The permanence of the employer-worker relationship.
• The amount of control an employer exerts over a worker.
• The extent to which the work performed is an integral part of the potential employer's business.
• The worker's skill and initiative.

In addition, the new rule states that "additional factors may also be considered if they are relevant to the overall question of economic dependence."

This shift in regulatory guidance imposes compliance burdens and legal uncertainties for employers. Set to go into effect March 11, the rule could spark an increase in misclassification lawsuits and have ramifications for the gig economy. The increased number of factors and lack of any controlling factors increase the ambiguity in determining status. In addition to the gig economy, industries such as construction, transportation, trucking, health care, and media could be significantly impacted.

The final rule is what is called an "interpretive" rule, rather than a "substantive" rule. That means the rule informs the public of DOL's view of the law but is not a binding regulation to which courts must defer. Ultimately it will be the court's interpretation of the rules that determines whether someone is classified as an employee or independent contractor.

The DOL's test applies only to the Fair Labor Standards Act (FLSA), and does not apply to other federal laws, including the National Labor Relations Act, or state wage and hour laws. Many states have their own tests that are applied to state-level wage and hour claims. For example, California, Illinois, New Jersey, and Massachusetts are among the states that apply a stringent "ABC test," which makes it much more difficult for many companies to treat workers as independent contractors.

On Jan. 11, a coalition of business groups, called the Coalition for Workforce Innovation, sued in the 5th U.S. Circuit Court of Appeals to block the rule before it takes effect on March 11. The group includes Uber, Lyft, Mary Kay, the American Trucking Association, Associated Builders and Contractors, and the Financial Services Institute. More legal challenges are expected.

While implementation may be delayed by legal challenges, employers should prepare now:

• Review agreements and insurance certificates with existing independent contractors. Some contractors may no longer meet the new criteria and changes to the nature of the relationship or classification may have to be made.
• Consider class-action waivers in all arbitration agreements with independent contractors.
• Update policies and procedures, including protocols for engagements with gig workers and other independent contractors.
• Train managers on best practices for navigating independent contractor relationships.

The debate is far from over, particularly given that we are a year away from a national election.