Misclassifying workers as independent contractors rather than employees is a costly mistake. Among the many issues arising from misclassification is potential liability under federal and state minimum wage and overtime laws. As the laws continue to change and develop, so do the risks to contracting entities.

Federal Changes

On January 6, 2021, the United States Department of Labor (DOL) announced its proposed Independent Contractor Rule to address the distinction between independent contractors and employees. After a delay for consideration of comments received in response to the proposed rule, it was scheduled to go into effect on May 7, 2021. However, on March 12, 2021, the DOL published a notice of proposed rulemaking to withdraw the Independent Contractor Rule. The DOL withdrew the rule on May 5, 2021 before it ever took effect. DOL Fact Sheet #13 continues to constitute the DOL’s guidance on the distinction between employees and independent contractors. Whether those factors are satisfied for a particular workers will require industry- and jurisdiction-specific analysis.

President Biden’s DOL also withdrew Trump-era opinion letters on independent contractor status as having been issued prematurely, before the proposed Independent Contractor Rule became effective. The withdrawn opinion letters include:

  • FLSA2021-9 (insisting that tractor-trailer owner-operators comply with legal, health, and safety standards to which they are already bound does not affect the control analysis for independent contractor classification purposes, but that control over their schedules, the non-exclusive working relationship, and their discretion over freight selections, hiring decisions, insurance, and capital investments supported their independent contractor status);
  • FLSA2021-8 (perishable food product distributors were independent contractors based in part on their control over their schedules and assignments, non-exclusive working relationship, freedom from supervision, and discretion over purchases, target customers, marketing, and billing arrangements); and
  • FLSA2019-6 (service providers for a virtual marketplace company (VMC) were independent contractors based in part on the fact that they could choose their own hours, cancel a job, and work for competitors, had to purchase all necessary resources to perform their work, and were not operationally integrated into the VMC’s referral business).

Thus, despite significant activity by the DOL, none of the above Trump-era guidance is in effect.

California Developments

In 2018, the California Supreme Court adopted the “ABC test” for evaluating whether a worker is properly classified as an independent contractor. Under the ABC test, which is considerably more difficult to satisfy than the flexible Borello test that it replaced, a worker is considered an employee and not an independent contractor, unless the hiring entity meets all three of the following conditions:

  1. The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
  2. The person performs work that is outside the usual course of the hiring entity’s business; and
  3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The California legislature codified the ABC test in AB5, which became effective January 1, 2020.

Entities defending misclassification cases on the basis that they were correctly classifying employees before Dynamex, were dealt a significant blow. In January 2021, the California Supreme Court held in Vazquez v. Jan-Pro Franchising that the ABC test it articulated in Dynamex was an interpretation of existing law, and therefore, applied retroactively.

The Ninth Circuit rejected the argument that California’s independent contractor test is preempted by federal law. In April 2021, California Trucking Ass’n v. Bonta, the Ninth Circuit held that the Federal Aviation Administration Authorization Act did not preempt California’s independent contractor test. The California Trucking Association filed a writ of certiorari seeking review by the United States Supreme Court in August 2021.

Even California’s successful ballot initiative, Proposition 22, which exempted app-based drivers from AB5, is facing a challenge. California voters passed this ballot initiative in November 2020. In August 2021, a California state court found the law unconstitutional, and a coalition of the companies that funded Prop 22, the Protect App-Based Drivers & Services Coalition, has promised to appeal the decision.

The ABC Test Exists In Other States

Several other states have adopted the ABC test for employee classification as it pertains to compliance with state wage and hour laws (either completely for certain industries only) including:

  • Connecticut
  • District of Columbia (for construction)
  • Illinois (for construction)
  • Maryland (for construction and landscaping)
  • Massachusetts
  • Nebraska
  • New York (for construction)
  • New Jersey (for construction)
  • Vermont

Due to the proliferation of the ABC test under state law, and the fluctuation in federal guidance, companies should consult legal counsel before designating workers as independent contractors no matter where they operate.