Biden Administration's Proposed New Independent-Contractor Test Can Impact Your Company's Bottom Line

A SPECIAL REPORT featuring analysis from Tripp Scott's Paul O. Lopez and Brittany Hynes

Companies routinely use independent contractors for special projects and isolated assignments as a way to cut down on the normal costs connected to hiring full time W-2 employees.  However, companies often misunderstand what a true independent contractor is versus a W-2 employee. 

This can place a bullseye squarely on a company’s back either through a Department of Labor (“DOL”) audit of its classification of laborers or through federal lawsuits filed under the Fair Labor Standards Act (“FLSA”) for alleged unpaid wages and overtime owed to misclassified independent contractors who are alleged to be employees.

The Biden administration’s Labor Department is looking to make it tougher to classify a worker as an independent contractor by modifying the current U.S. Department of Labor’s Wage and Hour Division (“WHD”) regulations “to be more consistent with judicial precedent and the act’s text and purpose.” Employers need to be aware of these changes and the potential impact it will have on their labor costs if fully implemented.

The Proposed Regulation Replaces the Trump Administration’s Standard

In essence, the proposed regulation clarifies when workers should be classified as independent contractors who are in business for themselves or as employees who are afforded the full minimum wage, overtime, and other protections provided under the FLSA. Once finalized, the rule would replace the current test which was instituted by the Trump Administration.  

The Biden Administration’s proposed regulation states that it seeks to “restore” the test used by the courts to determine independent contractor status.  In fact, the proposed rule reinstates guidance similar to that used under the Obama Administration, which is considered less favorable to classifying workers as independent contractors. In other words, the proposed test lowers the bar for employee classification.

If implemented, it would essentially reverse the Trump Administration’s regulation which focused on two “core” factors: the nature and degree of control over the work and the worker’s opportunity for profit or risk of loss. It also recognized three other less probative “non-core” factors: the amount of skill required for the work, the degree of permanence of the working relationship, and whether the work is an integral part of the purported employer’s business. 

As stated in the proposed Rule’s Executive Summary, instead of focusing on “core” and “non-core” factors that were the central considerations in the 2021 Trump Rule, the new regulation focuses on “the totality-of-the-circumstances analysis in which the economic reality factors are not assigned a predetermined weight and each factor is given full consideration.”

The largest discrepancy between the approach created by the Trump Administration’s Labor Department and the Biden Administration’s Labor Department proposed rule is Biden Administration’s attempt to give more weight to a particular “non-core” factor: whether the work is integral to the employer’s business. This factor almost always favors employee status, thereby causing many courts over the years to afford it less weight than the other enumerated factors.

The Specifics and Legal Effect of the New Rule

The proposed regulation also provides more significance to circumstances that Trump Administration’s Rule did not emphasize, such as the “control” factor to “scheduling, supervision, price-setting, and the ability to work for others.”

Specifically, the proposed test sets forth six factors for determining the “economic reality” of the parties’ relationship, which has been the general focus of the courts for decades: 

• Opportunity for profit or loss depending on managerial skill

• Investments by the worker and the purported employer

• Degree of permanence of the work relationship.

• Nature and degree of control over the performance of the work and the economic aspects of the working relationship.

• Extent to which the work is an integral part of the purported employer’s business.

• Skill and initiative of the worker

The proposal then goes on to add a seventh factor, which is described as any factors that “in some way indicate whether the worker is in business for themselves], as opposed to being economically dependent on the employer for work.”  The seventh factor seems to be a catch-all provision that would in many cases lead to a finding that the laborer was an employee vs. an independent contractor.

Legal Effect

While the proposed new regulation is limited in its application, as it only pertains to laws that the Labor Department enforces, such as the FLSA, it is likely that many employers and regulatory bodies in other jurisdictions are likely to consider the DOL’s interpretation when making decisions about worker classification, and many judges are likely to give deference to the regulation.

Clearly, this change in policy would make it more difficult for companies to treat workers as independent contractors, thereby raising operational costs for gig companies, and construction, trucking, and other industries that rely on independent contractors to staff their fleets.

Many of these companies would need to reclassify their independent contractors as employees under the new proposed regulations, and would be required to pay these employees, among other things, minimum wage, overtime, a portion of a worker’s Social Security taxes and contributions to unemployment insurance. 

These additional financial requirements can dramatically impact a company’s bottom-line depending on how reliant the organization is to using independent contractors under the current regulations.

Given these potential impending changes, it is critical for businesses to assess and soberly reflect upon how they are currently leveraging independent contractors under the current definition.  As a reminder, it is of no moment whether there is an agreement that refers to the laborer as an independent contractor; the test will be whether the laborer actually meets the definition of an independent contractor under current and/or proposed regulations 

Business owners cannot ignore these proposed changes and should steer away from empty cure-all approaches such as revising the language of independent contractor agreements.

The issue is not what is contained in writing in an agreement but, rather, the key is how a company starts adapting its true behavior to comport with the regulations in order to avoid costly litigation or penalties imposed by the DOL.