On 20 January 2020, the Biden Administration froze rules published in the Federal Register that have not yet taken effect, including a Department of Labor (DOL) Final Rule addressing whether a worker is an “employee” or “independent contractor” under the Fair Labor Standards Act (FLSA) and a Final Rule revising its tipped employee regulations under the FLSA.
On 3 February 2020, the DOL proposed extending the effective date of both rules by 60 days (until 7 May 2021 and 30 April 2021 respectively) to allow the agency more time for review. The Biden Administration is expected to take steps to undo both rules.
Final Rule on Worker Classification
The DOL’s Final Rule on worker classification would expand the scope of workers who could be deemed contractors by placing an increased emphasis on two “core” factors: (i) the nature and degree of the worker’s control over the work and (ii) the worker’s opportunity for profit or loss based on initiative and/or investment.
The Final Rule also outlines three factors that may serve as additional guideposts in the classification analysis, although these factors are not to be afforded as much weight as the core factors:
- The amount of skill required for the work: this factor weighs in favor of independent contractor status when the individual’s work requires specialized training or skill that the employer does not provide;
- The degree of permanence of the working relationship between the worker and the potential employer: this factor weighs in favor of independent contractor status where the relationship is definite in duration or sporadic. In contrast, exclusive and long-term relationships may suggest employment status;
- Whether the work is part of an integrated unit of production: here, the Rule explains that the focus should be on whether the work is actually a part of the integrated unit of production, rather than whether the work is important or central to the employer’s business.
The preamble to the Rule also addresses a comment by the Society for Human Resources Management requesting that the DOL clarify whether providing benefits to a worker renders that worker an employee. The DOL notes that offering a worker retirement and health benefits does not automatically render the worker an employee, but that providing workers with the same employer-provided health or retirement plans on terms that a business provides to its employees may be indicative of employment status.
Employers can expect a focus on intentional misclassification and stricter enforcement of existing laws under the Biden Administration. Mr. Biden has pledged to fund a dramatic increase in the number of investigators to facilitate a large anti-misclassification effort. He also has also voiced support for a federal standard modelled on the so-called “ABC test” – under which workers would be presumed to be employees unless the employer satisfies certain conditions – for all labor, employment and tax laws.
Employers should also take note that the Final Rule does not alter the laws in those states that have adopted more stringent independent contractor analyses, nor does it affect other federal laws pertaining to worker misclassification. Therefore, businesses should continue to be mindful of the specific laws in the jurisdictions in which they operate and analyze worker misclassification under all applicable laws and regulations prior to formalizing any independent contractor relationship.
Final Rule on Tip Regulations
The DOL’s Final Rule revises its tipped employee regulations to address amendments made to section 3(m) of the FLSA by the Consolidated Appropriations Act of 2018 (CAA), which prohibits employers from keeping tips received by their employees, regardless of whether the employer takes a tip credit. It also prohibits employers from allowing managers or supervisors to keep any portion of employee’s tips.
The Final Rule also addresses how the tip credit applies to employees who perform tipped and non-tipped duties and which non-tipped duties are related to a tip-producing occupation, changes that would primarily affect the restaurant industry. In particular, the Final rule would allow businesses to pay more tipped workers a lower minimum wage of USD 2.13 per hour (instead of the full minimum wage of USD 7.25) and permit restaurants to require servers to pool and share tips with “back-of-the-house” employees who do not customarily and regularly receive tips, such as cooks and dishwashers.
During his campaign, Joe Biden committed to end the tipped minimum wage. President Biden’s proposed USD 1.9 trillion pandemic relief package, the American Rescue Plan proposes to end the tipped minimum wage (and raise the federal minimum wage to USD 15 per hour). Congressional Democrats also recently introduced the Raise the Wage Act, which would guarantee that tipped workers are paid at least the full federal minimum wage by 2027 by phasing out the subminimum wage for tipped workers.