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DOL rule change may fuel litigation


A U.S. Department of Labor proposal that would expand the number of workers who are considered employees rather than independent contractors potentially could lead to more employment-related lawsuits, experts say. 

They also point out, however, that interpretation of the governing law on this issue, the 1938 Fair Labor Standards Act, is determined by the courts, which may not necessarily give deference to the DOL’s own analysis of the law.

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

Some observers describe the DOL proposal as an effort to bring federal enforcement more in line with these state laws while still complying with the FLSA.

The DOL has changed its approach to this issue several times in recent years, reflecting the party of the administration holding office, experts say (see related story, below). 

The proposed rule would return the standard of evaluating who is an employee to the one established during the Obama administration and would reject the more pro-business standard of the Trump administration, which is now in effect, observers say.

It would restore the multifactor analysis to determine whether a worker is an employee or a contractor and ensure all factors are analyzed without assigning a “predetermined weight” to any one, among other impacts, the DOL said, in describing the proposal as “more consistent with longstanding judicial precedent.” 

“The department is trying to downplay the impact of this rule, but make no mistake, it is designed to have a much broader brush with respect to determining employee status,” said Michael J. Lotito, San Francisco-based shareholder and co-chair of the Workplace Policy Institute at Littler Mendelson P.C. 

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

Michael W. Kelly, a partner with Squire Patton Boggs in San Francisco, said, “It’s going to excite the plaintiff lawyers” and it is “going to cost businesses a lot of money, one way or another, whether they are paying just for fines, or judgments.” 

Noah A. Finkel, a partner with Seyfarth Shaw LLP in Chicago, said, “This is an area where traditionally courts defined who’s an employee and who’s a contractor.” 

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

With scores of judicial decisions on the law issued since 1938, the courts “will follow their precedent,” said Richard Reibstein, a partner with 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’re doing their job correctly,” they will also look at regulations issued by the agency that is charged with enforcing the underlying laws, “so I don’t think this is something any business can ignore.”

Meanwhile, more than a dozen states operate with the ABC test, which is more stringent than the latest DOL proposal, leading plaintiffs attorneys to file litigation on this issue under state, rather than federal, law. 

Under California’s ABC test, for instance, an employer must consider a worker a contractor if he or she is free from the hiring entity’s control and direction; performs work that is outside the usual course of the hiring entity’s business; and is customarily engaged in an independently established business of the same nature involved in the work performed. 

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

The DOL’s notice of proposed rulemaking indicates the Biden administration considered adopting the ABC test burden but decided not to because it cannot use its rulemaking authority “to enact such a massive change,” said Aaron Goldstein, partner with Dorsey & Whitney LLP in Seattle.

The latest proposal is “somewhere between where they were and where the ABC test is, and I do think it’s going to move the test that gets applied on a national basis a lot closer to California but not quite there,” Mr. Kelly said.

In light of the proposed rule, employers in non-ABC states should take a fresh look at their policies, observers said.

“There’s going to be more attention paid to the FLSA once this rule takes effect,” which presumably the DOL wants to happen “before it ramps up certain investigations,” Mr. Meyer said.

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

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

Contractor regulation shifts again 

The U.S. Department of Labor’s varying positions on how to define independent contractors and employees reflects the changes in administration.

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

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

“It does have a mindset of someone who’s standing in line to punch a timeclock,” as opposed to the gig economy, in which many workers are classified as independent contractors, said Christopher L. Nickels, a partner with Quarles & Brady LLP in Milwaukee. 

Guidance issued by the Obama administration in 2015, which reflected an expansive view of who is an employee, said some employees were being intentionally misclassified as independent contractors to cut costs and avoid compliance with the labor law.

In January 2021, during the waning days of the Trump Administration, the Labor Department issued a more restrictive final rule that focused on workers’ control over the work and their opportunity for profit and loss, in determining whether they were employees or independent contractors.

The rule was scheduled to take effect in March 2021, but its implementation was delayed because of its review by the Labor Department under the Biden administration.

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

But in March 2022, a federal court in Beaumont, Texas, said the DOL’s withdrawal of the rule was illegal, holding that before rescinding it the department “was required to contemplate alternatives within the ambit of the rule” but had failed to do so. 

As a result, the Trump administration rule has remained in effect, which prompted the latest DOL proposal.