With the Department of Labor’s new independent contractor rule slated to take effect on March 11, employment specialists are urging employers to take a conservative approach to compliance, pointing to several gray areas that could prove tricky to navigate.
“You need to assume that most of your workers are employees, unless it's pretty clear that they're not, and not the other way around,” said Lauren Teukolsky, who represents workers at Teukolsky Law. “It’s definitely the safest course.”
The rule, which still faces legal challenges that could derail it before it takes effect, revises the department’s interpretation of the Fair Labor Standards Act’s classification provision by instituting a “totality-of-the-circumstances” framework for analyzing independent contractor status based upon six factors.
That “totality-of-the-circumstances” approach effectively restores the department’s approach before it was changed by the last administration to favor certain factors over others in a bid to sharpen its focus.
Given the way the test has changed from one administration to another, Travis Gemoets, who represents employers as a partner at Jeffer Mangels Butler & Mitchell, says employers should stick to the most restrictive version of the test.
“Don't follow the winds of politics,” Gemoets said. “Just do everything you can to make sure that on the whole you're meeting these six factors.”
The six prongs under the revised test look at 1) the worker’s opportunity for profit or loss, 2) the financial stakes they’ve invested in the work, 3) the permanence of the work relationship, 4) the control the company has over the worker, 5) whether the worker’s services are essential to the company’s business and 6) the worker’s skill and initiative.
Under the previous administration, DOL gave greater weight to the control and profit prongs, making it easier, critics said at the time, to classify workers as independent contractors. Supporters of that more focused version of the test said it gave businesses more clarity for compliance purposes.
The rule from the last administration was first delayed and then withdrawn by the Biden administration. Both moves were successfully challenged in litigation, and a federal appeals court paused the DOL’s subsequent appeal as the federal agency prepared last week’s rule.
There are more legal challenges, although it’s not clear any of them will stop the rule from taking effect in March. Among them, a group of freelance writers and editors filed suit against DOL Jan. 16 in the U.S. District Court of the Northern District of Georgia, alleging the rule “obscures the line between contractor and employee in an impenetrable fog” and “enables the Department’s enforcement officers and trial lawyers to label anyone performing services for another company to be deemed an ‘employee’ under essentially any circumstance.”
While Gemoets said he advised employers to satisfy all six prongs of the independent contractor test even after the previous administration sought to favor certain factors over others, he said a test that eschews focusing on two core factors in favor of considering the totality of circumstances makes it hard for employers to gauge whether they’ve accurately classified their workers.
“It gives judges a lot more discretion as to whether or not somebody is an independent contractor,” Gemoets said. He added, “If a judge was dead-set on deeming a workforce to be employees, they’re going to be able to find some factor, presumably, that they could focus on and say, ‘Well, you didn’t meet this factor.’”
The six prongs of the test are also non-exhaustive, Gemoets says, leaving open the possibility of other factors that an employer could inadvertently fail to satisfy.
Teukolsky disagreed the six-factor test will leave employers in the dark, given how it is more or less a return to the “economic reality” test that existed for decades prior to the last administration’s shift. She flagged one area of ambiguity that the DOL rule did not address, however: “Who has the burden to prove employee status or independent contractor status?” Teukolsky said.
In California, where Teukolsky practices and which uses an even harder-to-pass independent contractor test than the one introduced by the DOL, the presumption is that a worker is an employee unless proven otherwise by an employer. The DOL rule does not outline such a presumption, Teukolsky said, adding “the burden of proof in this analysis is something that courts will have to deal with.”
The clarity of the three-factor “ABC” test used in California, Massachusetts and other states — which automatically assumes workers are employees, unless an employer can prove they meet all three prongs of the test to qualify as independent contractors — is why many workers’ advocates prefer it to the DOL’s six-factor test, said Terri Gerstein, director of labor initiative at NYU Robert F. Wagner Graduate School of Public Service. States that already use the “ABC” test to determine independent contractor status for wage and hour purposes will generally not be impacted by the DOL’s new rule, since those states have more worker-friendly wage and hour laws than the minimum standards set by the Fair Labor Standards Act, Gemoets and Teukolsky said.
“One thing I would always recommend is being aware of not only federal law, but also of state laws and increasingly local laws,” Gerstein said. “The smartest thing to do is just apply the strongest test.”