Federal Court Reinstates Independent Contractor Rule

Federal Court Reinstates Independent Contractor Rule

On March 14, 2022, the United States District Court for the Eastern District of Texas ruled that the Biden Administration’s attempt to rescind the Trump Administration’s rule “Independent Contractor Status under the Fair Labor Standards Act” (the “Independent Contractor Rule”) violated the Administrative Procedure Act (“APA”).

Toward the end of the Trump Administration, the Department of Labor (“DOL”) issued the Independent Contractor Rule, clarifying the test for classifying workers as “independent contractors.” The Independent Contractor Rule applied an economic realities test that primarily focused on whether the worker operates his or her own business or is economically dependent on the hiring entity. The test included an analysis of the following factors:

1. The extent to which the services rendered are an integral part of the principal’s business.
2. The permanency of the relationship.
3. The amount of the worker’s investment in facilities and equipment.
4. The nature and degree of control by the principal.
5. The worker’s opportunities for profit and loss.
6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the worker.
7. The degree of independent business organization and operation.

Ultimately, the most important factors under the test were the nature and degree of the worker’s control of the work and the worker’s opportunity for profit or loss.

The Independent Contractor Rule was scheduled to go into effect on March 8, 2021; however, the Biden Administration’s DOL delayed the effective date until May 7, 2021. The Biden DOL concluded that the Independent Contractor Rule did not provide clarity to the economic realities test and withdrew the rule entirely before it became effective.

The Biden DOL, however, was required to provide notice of its intention to issue a proposed rule and provide the public an opportunity to comment on the proposed rulemaking. The court found that the DOL did not provide a sufficient notice-and-comment period and, thus, violated the APA. In reaching its ruling, the court found that the DOL could have achieved its stated goal of providing more guidance for the independent contractor analysis and creating regulatory certainty without withdrawing the rule entirely. As a result, the court ruled that the Independent Contractor rule became effective as of March 8, 2021 and remains in effect.

The court’s decision is a win for businesses that rely heavily on contract workers, particularly those in the gig economy. However, the victory for employers may be short-lived. Employers should prepare for the DOL to either attempt to undo the Independent Contractor Rule again or to craft its own standard for determining independent contractor status.

President Biden has nominated David Weil to be administrator of the DOL, Wage and Hour Division. Weil previously led the division during the Obama Administration. During his tenure, he issued an interpretation stating that most workers are employees under the Fair Labor Standards Act. If Weil is confirmed, this could mean that the Biden Administration will eventually implement stricter requirements for classifying workers as independent contractors.

Employers should continue to monitor the Biden Administration’s attempts to alter or eliminate the Independent Contractor Rule. Employers also must be mindful of state laws (e.g., Massachusetts, California) that provide much more stringent tests to determine whether a worker is an independent contractor or an employee.

If you have any questions regarding this Alert, please contact the authors, Jeff Mokotoff, partner in our Atlanta office at jmokotoff@fordharrison.com, and Alyce Ogunsola, senior associate in our Atlanta office at aogunsola@fordharrison.com. Of course, you can also contact the FordHarrison attorney with whom you usually work.