Civil Law

Today the U.S. Department of Labor in the second Trump administration issued a proposed regulation regarding the classification status of independent contractors (ICs). As we noted three days ago in a blog post written in anticipation of the issuance of the proposed new rule, we expected it to be almost a carbon copy of the 2021 regulation issued by the first Trump administration, which was replaced by a 2024 regulation issued by the Biden administration — and it is precisely that, almost word for word. There are 125 pages in supplementary material that precede the proposed regulation, and that lengthy commentary does little more than set forth the current administration’s view of existing court decisions addressing the status of ICs and court decisions dealing with the history of the prior regulations on this topic. We also noted in the blog post earlier this week that “if, as expected, the new regulation again is simply an interpretation of court decisions by the current Administration, it will likely be disregarded by the federal courts,” just as the 2021 and 2024 regulations have been. As we remarked previously about this ping-pong match of competing regulations on the issue of IC status under the federal Fair Labor Standards Act (FLSA), the new rule, once finalized, would be “much ado about (almost) nothing.”

Analysis

A review of the proposed regulation issued today has no meaningful differences from the wording of the 2021 rule on IC status issued by the first Trump administration. The only difference is a few of the examples given in the proposed rule dealing with the transportation and the construction industries.

The first part of the proposed regulation would rescind all inconsistent or conflicting administrative rulings, interpretations, practices, and enforcement policies of the Labor Department relating to the classification of ICs and employees. This approach appears to be a means to override the Biden administration’s 2024 rule on the subject.

The next part of the proposed rule recites the time-honored principle under the FLSA that a worker is an IC only if he or she is, as a matter of economic reality, “in business for him- or herself.” The proposed regulation then lists five factors to be examined, but states the five factors “are not exhaustive and no single factor is dispositive.” The proposed rule also notes that any factor related to the relationship between an individual and potential employer may be relevant. Notably, the courts under the FLSA have considered dozens of factors bearing on IC status, and the proposed regulation therefore validates this type of broad judicial inquiry.

Of the five factors, the Labor Department’s proposed regulation refers to two as “core factors”: (1) the nature and degree of the individual’s control over his/her work; and (2) the individual’s opportunity for profit or loss. The proposed regulation states these two core factors “are the most probative as to whether or not an individual is an economically dependent ‘employee,’ … and each is therefore afforded greater weight in the analysis than is any other factor.” While the proposed rule does not create a legal presumption, it does say that if both core factors point toward the same classification, whether employee or IC, “there is a substantial likelihood that is the individual’s accurate classification.”

This is not a new way to analyze IC status under the FLSA; rather, it is consistent with current jurisprudence. As the Department of Labor states in its lengthy supplementary material appearing before the proposed rule, “whenever the control and opportunity factors both pointed to the same classification – whether employee or independent contractor – that was the court’s conclusion regarding the worker’s ultimate classification.” Proposed Rule at note 140.

Under the control factor, the proposed rule restates many of the same conclusions that most courts have already articulated — that several types of activities do “not constitute [the type of] control that makes the individual more or less likely to be an employee under the Act.” Those types of control that are not meaningful include requiring an individual to:

• Comply with specific legal obligations;
• Satisfy health and safety standards;
• Carry insurance;
• Meet contractually agreed-upon deadlines or quality control standards; or
• Satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships).

While the proposed regulation notes that requiring the individual to work exclusively for one company demonstrates control (which is consistent with court decisions), it considerably overstates the law when it says that requiring the individual, directly or indirectly, to work exclusively for a potential employer weighs in favor of the individual being an employee under the FLSA. Many legitimate ICs, for example, commit to one or more projects that require a concentrated, full-time undertaking to produce deliverables within a tight timeframe; that is hardly the type of control that should support employee status.

The profit or loss factor expands the manner in which courts have considered a worker’s investment. Some have examined only the worker’s financial investment. However, the proposed regulation would follow newer court decisions that also have examined the manner in which profits are maximized by the individual’s initiative.

Next, the proposed regulation addresses the three “other” factors: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship; and (3) whether the work is part of an integrated unit of production.

The amount of skill required factor fails to mention that many legitimate ICs do not have what some may refer to as an elevated skillset, yet they may have little or no economic dependence on a business. While some may think that taxi drivers, for example, do not have a high degree of skill, a number are very skillful and operate their own taxi business as ICs, as the courts have found over the years. Likewise, a doctor working for a hospital has elevated skills, but that does not make him or her an IC if the hospital directs and controls his or her work while he or she works at a fixed salary in a hospital.

The degree of permanence factor in the proposed regulation failed to recognize that many IC relationships are at least semi-permanent by choice of the worker: for example, a gardener who provides service weekly to a homeowner for 20 years; a distributor who chooses to operate his or her own business distributing another company’s products exclusively; and a tutor who provides frequent tutoring to the same family’s children throughout their school years.

The final factor is characterized as whether the work “is part of an integrated unit of production.” As the proposed rule states: “This factor is different from the concept of the importance or centrality of the individual’s work to the potential employer’s business.” In this manner, the Department of Labor is seeking to change the focus of this factor, which historically has been given little weight by the courts anyway.

As noted above, the proposed regulation adds a new subsection with six examples of workers and comments on whether the workers would be properly classified as employees or ICs under the final regulation.

Lastly, the proposed regulation addresses the “primacy of actual practice.” It states that a company’s actual practice is more significant than what is written in a purported IC’s contract.

The Labor Department’s proposed rule, like the first Trump administration’s 2021 Rule and the Biden administration’s 2024 Rule, is also likely to face lawsuits regarding its enforceability. But because no court has relied upon either of those other rules in determining the IC status of workers, such litigation has limited practical meaning.

Of course, the Labor Department’s proposed rule has no application to the IC status of workers under most other federal laws, such as ERISA and the National Labor Relations Act, which have different worker classification tests. It also has no application to the classification of workers under state IC tests, most of which vary considerably from the test under the FLSA. And most litigation against companies alleging IC misclassification arises in whole or in part under state laws and not exclusively the federal wage and hour law.

Takeaway

IC compliance and misclassification has been front-page news for many years. State workforce agencies and plaintiffs’ class action attorneys have continued to focus on companies that are out of compliance with federal and state IC laws.

Many companies that utilize a number of ICs may be vulnerable to misclassification liability if they are not in a heightened state of compliance with applicable federal and state laws. Some companies have resorted to a process such as IC Diagnostics (TM) to elevate their level of compliance with IC laws. Companies willing to reevaluate their compliance in this area can, consistent with their current business model, restructure, re-document, and re-implement their IC relationships in a manner that is customized and sustainable.

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