Continuing the chaos over the appropriate standard for determining independent contractor status, a federal judge has overturned the Biden administration’s attempt to withdraw the employer-friendly independent contractor rule issued in the waning days of the Trump administration. This means that the Trump Department of Labor’s rule is back in effect pending the undoubtedly forthcoming action from the Biden DOL.
Independent Contractor Status. A worker who is an independent contractor is generally not protected by employment laws, and companies are not required to provide them with employment benefits (including health insurance, leave, or retirement benefits) or pay employment taxes and contributions (including workers’ compensation and unemployment insurance). The misclassification of employees as independent contractors – enabling companies to avoid these obligations – has become a particularly hot area of employment litigation in recent years.
The Trump Rule. Adding to the confusion, the standard for the determination of independent contractor varies across laws, agencies, and courts at both the federal and state level. As discussed in our January 6, 2021 E-lert, just prior to the change in administration, the Trump DOL joined this fray by issuing a Final Rule that adopted an “economic realities” test. This test, which newly set forth two “core” factors and three additional factors for the analysis, made it easier to achieve independent contractor status under the FLSA. It was scheduled to take effect in March 2021.
The Biden Administration’s Attempt to Withdraw the Rule. Upon assuming office on January 20, 2021, President Biden issued an Executive Order that, in part, directed agencies to consider a 60-day or longer postponement of the effective date of regulations that had been published in the Federal Register but not yet taken effect. The DOL promptly announced a proposed rule to delay the effective date of the Final Rule to May 7, with a comment period of only 19 days (rather than the typical 30 or 60 days). It then announced a proposed rule to withdraw the Final Rule, with a 31-day comment period, asserting that the statutory language of the FLSA and longstanding case law do not support the new test set forth in the Final Rule. The Final Rule was formally withdrawn on May 6, 2021, as we discussed in our May 2021 E-Update.
The Court’s Ruling. The federal district court found that the 19-day comment period for the proposed delay of the Final Rule was too short, and the content of the proposal was too restricted, to provide the public with a meaningful opportunity for notice and comment. Nor was there any good cause to bypass the typical 30-day period. With regard to the actual withdrawal of the Final Rule, the court found that the reason for the withdrawal was arbitrary and capricious, as the Biden DOL had failed to consider potential alternatives to rescission of the Final Rule, as it was required to do by law. The court vacated both the delay and withdrawal rules, meaning that the Final Rule is in effect.
What Now? We expect the Biden DOL to appeal the district court’s ruling to the U.S. Court of Appeals for the Fifth Circuit, although that is typically a conservative court that will likely agree with the district court. In the alternative, and quite likely, the Biden DOL may engage in a new round of rulemaking. But for the time being, employers may rely on the Trump Final Rule (although keeping in mind that courts are not bound by the rule, and some have rejected it in favor of stricter standards). We will continue to monitor and update you on this situation.