Department Of Labor Reverses Trump Rule For Independent Contractors
The worker misclassification fight over whether an individual is an employee or independent contractor is not new. For decades, employers have been misclassifying their workers, often to save money on costs.
For instance, by hiring an independent contractor instead of an employee, the employer isn’t required by the Fair Labor Standards Act of 1938 (FLSA) to pay the worker minimum wage or overtime. The employer is also relieved of certain recordkeeping requirements. So it’s easy to see why an employer would be tempted to misclassify its workers.
This worker misclassification temptation exists in other contexts, like taxes. By (mis)classifying a worker as an independent contractor instead of an employee, the employer can avoid paying payroll taxes.
The IRS has guidelines to help decide if an employer has misclassified a worker for federal tax purposes. The U.S. Department of Labor (DOL), which enforces the FLSA, also has guidelines to assist in worker classification issues. However, these could use additional clarity, especially in the FLSA context.
There have been several attempts to provide a well-defined rule for worker classification. Yet the most recent attempt has been repealed by the Biden administration. Let’s take a look at how we got to this point.
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The DOL’s Recent Attempts to Define Worker Classification Under the FLSA
During Obama’s presidency, the DOL issued an Administrator’s Interpretation (AI). This was informal guidance as to how the DOL should assess an employer’s classification of its workers. This AI came out in 2015 and took a pro-employee approach by applying a six-part “economic realities test” where all factors were to be equally considered.
These factors were similar to the ones listed in the 2015 AI, but there’s a key difference. The Trump-era rule placed greater weight on two “core factors” that focused on the control an employer had over an individual’s work and the opportunity for profit and loss.
This shift in how each of the five factors was to be considered meant it was easier for an employer to classify someone as an independent contractor.
This rule was to go into effect in March 2021, although President Biden pushed back that date and then eventually withdrew the rule. However, there is at least one legal challenge where business groups argue that the rule went into effect in March as originally planned.
Most well-known for applying in California, the ABC Test presumes a worker is an employee unless the employer can establish all of the following:
The individual could work in a manner that was free from the employer’s control;
The work done was outside the usual course of the employer’s business; and
The individual completed work that was of the same nature as work they customarily perform.
Most states and the federal government do not apply this worker-friendly classification test. President Biden campaigned in 2020 to change that, declaring his plan of applying the ABC Test in various contexts at the federal level.
One such area is collective bargaining. The Protecting the Right to Organize Act would use the ABC Test to enhance the collective bargaining rights of workers by making it easier for workers to qualify as employees under the National Labor Relations Act of 1935 (NLRA). This proposed law passed the House of Representatives but is currently stuck in the Senate.
Many of these laws provided workplace rights to employees, but not independent contractors. Some of these laws where the ABC Test would have implied included:
Unfortunately, it doesn’t look like the Worker Flexibility and Small Business Protection Act is going to become law anytime soon given the gridlock on Capitol Hill. But it shows that the fight over how to classify workers will continue into the foreseeable future, especially at the state level.