It’s back to square one for employers trying to determine who is an independent contractor versus an employee.
The U.S. Department of Labor has withdrawn a rule change that was rolled out in the waning days of the Trump administration aimed at clarifying workers’ status under the Fair Labor Standards Act.
The Biden administration postponed the rule from taking effect in March and last week withdrew it completely.
“The change was embraced by the U.S. Chamber of Commerce and business folks everywhere,” said Adam Childers, a labor attorney with Crowe & Dunlevy. “We’re essentially back to where we started.”
The rule would have made it easier for businesses to classify workers as independent contractors rather than employees by simplifying the “multiple-factor test” and focusing on two things, Childers said.
It provided that an individual is in business for himself or herself based primarily on the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss based on his or her own initiative.
Childers said two examples that illustrate the difference are a roofer and a security guard.
A roofer who determines the nature of the work, provides the tools, and decides when the job will start and what hours to work each day is an independent contractor.
A security guard who is required to wear a certain uniform, follow a code of conduct and work set hours is an employee.
Sometimes, however, it is fuzzy. Maybe a business hires a consultant to work on the rollout of a new IT platform but the contractor stays on after the rollout and soon is working on a variety of computer issues. Did the contractor become the IT director at some point?
When the Department of Labor pulled back the simplified definition of an independent contractor in March, everyone expected it would provide a new rule of a more progressive nature that would identify more workers as employees, Childers said.
Instead DOL announced May 5 it was pulling the proposed rule but not replacing it with anything for now. “The department believes that the rule is inconsistent with the FLSA’s text and purpose and would have a confusing and disruptive effect on workers and businesses alike due to its departure from longstanding judicial precedent,” according to the announcement.
Under the FLSA, employees are entitled to minimum wage, overtime pay, family leave, unemployment insurance and other benefits. Independent contractors are not entitled to such benefits, but they generally have more flexibility to set their own schedules and work for multiple companies.
Childers said DOL investigators likely will step up investigation, interpretation and enforcement of the law, which could spell trouble for businesses that don’t have a signed agreement with workers they hire as contractors.
“All it takes is a random audit of your industry or business or a complaint made by someone who thinks they were an employee,” he said.
Experts expect the Biden administration will implement its own rule which will classify more people as employees and therefore be eligible to receive the benefits that go along with it.
“They probably will shoot for something like the ABC test in California,” Childers said.
Under the ABC test, a worker is considered an employee unless the hiring entity satisfies all three of the following conditions: The worker 1) is free from the control and direction of the hiring entity in connection with the performance of the work, 2) performs work that is outside the usual course of the hiring entity’s business and 3) is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.
“It will be the subject of a lot of litigation if that happens,” Childers said.