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Understanding the Shifting Federal “Independent Contractor” Rules

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Businesses can be forgiven if there is confusion surrounding guidelines concerning the classification of workers as independent contractors vs. employees, and that’s because the rules on the federal level are constantly shifting.

In just 15 months, the Trump Department of Labor (DOL) issued a Final Rule that adopted an “economic realities test”, then the Biden DOL scuttled the Final Rule, and now a Texas federal judge has reinstated that former Final Rule.

Confused yet?

“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 issues 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,” surmised Fiona W. Ong in a post for the management workplace law firm Shawe Rosenthal LLP.

How a worker is classified can have major consequences for employers, so they need to understand the guidelines and rules.

“Under the Fair Labor Standards Act (FLSA), employees are entitled to minimum wage, overtime pay and other benefits. Independent contractors are not entitled to such benefits, but they generally have more flexibility to set their own schedules and work for multiple companies,” writes Lisa Nagele-Piazza for the Society for Human Resource Management (SHR) .

Employers need to keep an eye on more than just the Department of Labor when it comes to independent contractor rules.

“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,” writes Ong.

Texas Judge Sides with Businesses Coalition

The latest chapter in the independent contractor rule-making saga came when Texas U.S. District Court Judge Marcia A. Crone ruled last month in favor of plaintiffs (Coalition for Workforce Innovation, Associated Builders and Contractors of Southeast Texas, Associated Builders and Contractors and Financial Services Institute) who challenged that the Biden administration violated federal administrative procedure when it delayed and then killed the Trump administration rule.

The Insurance Journal says the legal challenge was based on the following factors:

  • DOL failed to provide sufficient notice.
  • DOL failed to consider alternatives.
  • DOL did not give time for meaningful comment before withdrawing the rule.

“Crone agreed with the business groups that the DOL didn’t provide the public with a meaningful opportunity to comment, because the notice-and-comment period for the “delay rule” was only 19 days,” wrote Nagele-Piazza.

The judge’s ruling essentially makes the Trump administration independent contractor rule in effect dating back to March 8, 2021.

Using the “Economic Realities Test” to Determine Status

Employers should be familiar with the “economic realities test” that is the basis of the Trump administration Final Rule.

This test is based on two core and three additional factors to determine if a worker could be classified as an independent contractor.

According to the SHRM, the two core factors are:

  • The nature and degree of control over the work.
  • The worker's opportunity for profit or loss based on initiative and investment.

And the three additional factors to consider are:

  • The amount of skill required for the work.
  • The degree of permanence of the working relationship between the worker and the potential employer.
  • Whether the work is part of an integrated unit of production (or the individual works under circumstances analogous to a production line).

“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),” concluded Ong.

Some States Adopting the “ABC Test”

Some states such as California with its “ABC test” have put their own independent contractor guidelines into place.

The ABC test, according to the SHRM, requires that three factors must be met for a worker to be classified as an independent contractor:

  • The worker is free from the control and direction of the hiring entity in connection with the performance of the work.
  • The worker performs tasks that are outside the usual course of the hiring entity's business.
  • The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

Other states such as Illinois, New Jersey, and Massachusetts also have stricter standards than the federal guidelines.

DOL lawyer Seema Nanda told the Insurance Journal that the current administration “is evaluating all legal options, including the potential for rulemaking.”

Contact Employer Flexible today for help in untangling workplace rules and HR support and solutions that can provide your business with peace of mind.