On May 6, 2021, the United States Department of Labor (DOL) withdrew the rules proposed by the Trump administration, which originally sought to revise the test for classifying workers as independent contractors at the federal level for purposes of wages and hours under the Fair Labor Standards Act (LSA). DOL Withdrawal alleges that the rules, which were originally scheduled to come into effect on May 7, 2021, would have been contrary to the text, purpose and jurisprudence of the FLSA.
The Trump-era rules, which never came into effect, would have largely maintained the “economic realities” test to determine whether a worker is in business for himself (an independent contractor) or is economically dependent on it. employer for work (an employee) for the purposes of the FLSA taking into account the following factors:
- The extent to which the services rendered are an integral part of the principal’s business.
- The permanence of the relationship.
- The amount of the worker’s investment in plant and equipment.
- The nature and degree of control exercised by the principal.
- The worker’s opportunities for profit and loss.
- The amount of initiative, judgment, or foresight in free market competition with others required for the success of the worker.
- The degree of independent organization and operation of the enterprise.
While none of the above factors is a strict requirement, the rules of the Trump era would have emphasized the importance of the degree of control exercised by the principal and the opportunities for profit and loss of the worker (the 4th and 5th factors in the above analysis).
Many companies, especially those in the odd-job economy, would have greatly benefited from these rules, which would have placed less emphasis on the fact that services are an integral part of the principal’s activity, the permanence of the relationship, the degree the worker, the degree of independent judgment used by the worker and the degree of independent organization / operation of the company (factors 1-3 and 6-7).
While the DOL’s withdrawal from the Trump-era rules simply means that these changes will not go into effect, employers should keep abreast of ongoing changes in this set of laws, as they can signal that the The Biden administration, sooner or later, will seek stricter requirements and / or interpretations of existing law, just as the Trump administration sought less restrictive ones.
In addition, recruiting entities should also keep abreast of legal developments in the states in which they operate, as applicable state law may be much stricter than federal law on this matter. In fact, many states, including California and Massachusetts, now apply the more stringent ABC test to determine whether a worker is an independent contractor or an employee. The ABC test of these states requires the presentation of the following to establish independent contractor status:
A. That the worker is free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact, and
B. That the worker performs work that is outside the normal course of business of the hiring entity, and
C. That the worker is habitually engaged in an independently established trade, occupation or business of the same nature as the work performed.
(Click on here for an in-depth discussion of the ABC test in California). Likewise, other states have adopted the ABC test in at least some contexts, such as UI, while using another test for the purposes of wages and hours laws (including calculating the minimum wage and overtime). Just as the change in California law was sudden and retroactive, hiring entities in other states could also face costly changes to their business operations. They should watch with caution the potential changes on the part of their state agencies and legislatures, in addition to changes at the federal level.
For example, in California, companies whose independent contractor agreements do not “pass” the ABC test could be subject to significant penalties, in addition to unpaid taxes, unemployment benefits, meal and rest bonuses, and wages unpaid by state and local governments and may face private actions by individuals brought in class and representational capacity.