Thanks to a ruling by the U.S. Department of Labor, it will now be easier for businesses to classify employees as contractors or gig economy workers.
The Jan. 6, 2021, ruling pushed by the Trump administration in its final days poses an “economic reality" test to determine whether an individual is an independent contractor or is economically dependent on an employer for work.
The latter designation classifies workers under the Fair Labor Standards Act (FLSA), which provides minimum wage guarantees and other protections regarding overtime pay, recordkeeping, and child employment in the private and public sector.
Another win for gig companies
Independent contractors or freelancers don't receive those federal protections, so the new ruling is considered a win for gig economy companies, such as Uber, Lyft, and Instacart, which rely heavily on gig workers.
It's the second significant policy victory for the sector since November, when California voters approved a measure exempting gig workers at giant tech firms from being classified as employees.
Proposition 22, the most expensive ballot initiative in state history, is being challenged in court by a group of California Uber and Lyft drivers.
The latest FLSA interpretation, which aims to provide a litmus test for employee classification, reverses prior guidance from the Obama administration, making it more difficult for companies to classify workers as independent contractors.
“This whole issue of whether an employee can be classified as a contractor has been hotly disputed for years," says Ashley Kelly, a litigation partner and co-chair of the Employment practice at Arnall Golden Gregory LLP in Atlanta.
Employee or contractor?
The Labor department ruling identifies five factors in determining employee classification, with the first two the most overriding:
- The nature and degree of control over the work.
- The worker's opportunity for profit or loss based on initiative and/or investment.
- The amount of skill required for the work.
- The degree of permanence of the working relationship between the worker and employer.
- Whether the work is part of an integrated unit of production.
Jennie Woltz, founding partner of Woltz & Folkinshteyn P.C. in Stamford, Conn., warns employers shouldn't solely rely on the new ruling to reclassify employees, given the upcoming change in administrations.
The rule, which will take effect on March 8, is expected to be derailed, postponed, or put aside by the incoming Biden administration, which said last month it would block any action by the Trump administration if it's not official by Inauguration Day. Biden's press secretary, Jen Psaki, told Bloomberg News the president-elect plans to issue a Jan. 20 memo freezing the ruling so it won't be implemented.
Woltz recommends business owners and human resources professionals analyze existing independent contractor arrangements and contract templates in light of the new rule and ongoing uncertainty.
“They should consider whether the arrangement or contract meets or fails the five factors test, and in appropriate cases, consider alternatives for reclassifying such workers as employees or shoring up the contractor classification," she says.
The interpretive ruling carries less legal weight and standing than a Labor department regulation and only applies to laws the agency enforces, such as minimum wage and overtime.
“Courts may not necessarily follow the DOL's interpretation," adds Woltz, whose boutique firm specializes in employment and labor law. “Though the rule will almost certainly be persuasive authority, courts are not obligated to follow it and may instead choose to follow the body of case law interpreting independent contractor status under the FLSA."
Wait it out
Kelly, who represents a wide range of employers nationwide, is advising clients to wait for more federal guidance.
She expects the Biden administration to reverse course again and present a more streamlined, simplified test that would classify more job holders as employees rather than contractors or gig workers.
“It's really tough for employers to react," says Kelly. “If the new administration can push through its priorities, there will be more clarity."