DOL rule change could fuel litigation

A The US Department of Labor’s proposal that would increase the number of workers considered employees rather than independent contractors could potentially lead to more employment-related lawsuits, experts say.

However, they also point out that the interpretation of the law governing this issue, the Fair Labor Standards Act 1938, is determined by the courts, which does not necessarily respect the DOL’s own analysis of the law.

Additionally, more than a dozen states, including California and New York, have laws that apply an “ABC” rule, which involves three nested methods for determining which workers should be classified as employees, and not subject to to the FLSA on this matter.

Some observers describe the DOL’s proposal as an effort to bring federal enforcement more in line with those state laws while respecting the FLSA.

The DOL has changed its approach to this issue several times in recent years, mirroring the party of the incumbent administration, experts say (see related article below).

The proposed rule would bring the standard for evaluating who an employee is back to that established under the Obama administration and reject the Trump administration’s more business-friendly standard, which is now in effect, observers say.

This would reinstate multifactor analysis to determine whether a worker is an employee or a contractor and ensure that all factors are analyzed without assigning a “predetermined weighting” to any of them, among other impacts, the DOL said. , describing the proposal as “more coherent”. with a long-standing judicial precedent.

“The department tries to minimize the impact of this rule, but make no mistake, it is designed to have a much broader brush when it comes to determining employee status,” said Michael J. Lotito, shareholder and co-chairman based in San Francisco. from the Workplace Policy Institute of Littler Mendelson PC

“I don’t think it revolutionizes the concept of an independent contractor employee,” but rather puts less emphasis on control and profit and loss in determining a worker’s status than in Trump administration regulation. , said Eric B. Meyer, partner of Fisher Broyles LLP in Philadelphia.

Michael W. Kelly, a partner at Squire Patton Boggs in San Francisco, said, “This is going to excite plaintiffs’ attorneys” and it’s “going to cost companies a lot of money, one way or another, qu ‘they just pay for fines or judgments.

Noah A. Finkel, a partner at Seyfarth Shaw LLP in Chicago, said, “This is an area where traditionally the courts define who is an employee and who is a contractor.

The DOL rule “is not a rule in the standard sense,” but an interpretation of the FLSA, Finkel said. The department’s rules are not binding and will be used “only to the extent the court finds them persuasive,” he said.

With dozens of court rulings on the law handed down since 1938, the courts “will follow their precedent,” said Richard Reibstein, a partner at Locke Lord LLP in New York.

Mr Kelly said: ‘I agree that the courts are going to continue to look at their history, but when they do their job properly they will also look at the regulations issued by the agency charged with enforcing the underlying laws. underlying. , “so I don’t think it’s something any company can ignore.”

Meanwhile, more than a dozen states are operating with the ABC test, which is stricter than the DOL’s latest proposal, leading plaintiffs’ attorneys to file a lawsuit over the issue under the law. state rather than federal law.

According to California’s ABC test, for example, an employer must consider a worker to be a contractor if they are free from the control and direction of the hiring entity; performs work that is outside the normal scope of the activities of the hiring entity; and is usually engaged in a similar independent business involved in the work performed.

“This is an area where states are restrictive” in designating workers as independent contractors, in part to ensure individuals are properly paid, but also to generate income from workers’ compensation and unemployment insurance, said Jonathan A. Segal, partner and managing director. with Duane Morris LLP in Philadelphia.

The DOL’s regulatory proposal notice says the Biden administration considered adopting the ABC test load, but decided against it because it cannot use its regulatory authority “to enact such a change.” massive,” said Aaron Goldstein, partner at Dorsey & Whitney LLP in Seattle.

The last proposal is “somewhere between where they were and where the ABC test is, and I think that’s going to move the test that’s nationally enforced a lot closer to California but not quite there- down,” Kelly said.

In light of the proposed rule, employers in non-ABC states should review their policies, observers said.

“There will be more attention given to the FLSA once this rule goes into effect,” which the DOL presumably wants to happen “before it escalates some investigations,” Meyer said.

“You want to watch now to make sure you got it right, or at least got it close enough, going forward,” he said.

“Employers should review who they have as independent contractors and consider the potential cost of misclassifying them under the new test,” versus the burden, challenge and expense of classifying them as employees , Mr. Kelly said.

Contractor regulations are changing again

The varying positions of the US Department of Labor on how to define independent contractors and employees reflect changes in the administration.

Regulation on the issue is based on the Fair Labor Standards Act, the 1938 law that requires an employer to pay an employee minimum wage as well as overtime compensation for hours worked in excess of a work week. 40 hours.

Observers say that in some ways regulation in this area is an effort to adapt a decades-old law to a changing economy.

“He has a mindset of someone standing in line to punch a clock,” as opposed to the gig economy, in which many workers are classified as independent contractors, said Christopher L. Nickels, partner at Quarles & Brady LLP in Milwaukee. .

Guidelines released by the Obama administration in 2015, which reflected a broad view of who an employee is, said some employees were intentionally misclassified as independent contractors to cut costs and avoid complying with labor laws. .

In January 2021, during the final days of the Trump administration, the Labor Department issued a more restrictive final rule that emphasized workers’ control over work and their opportunities for profit and loss, to determine s were employees or independent contractors.

The rule was supposed to go into effect in March 2021, but its implementation has been delayed due to its review by the Labor Department under the Biden administration.

In May 2021, the Biden administration rescinded the rule, with Labor Secretary Marty Walsh saying it would “help preserve workers’ rights and stop the erosion of worker protections that would have occurred had the rule gone into effect.” vigor”.

But in March 2022, a federal court in Beaumont, Texas ruled that the DOL’s withdrawal of the rule was unlawful, finding that before overturning it, the department “was required to consider alternatives within the framework of the rule”, but had not done so.

As a result, the Trump administration’s rule remained in effect, prompting the DOL’s latest proposal.