Independent Contractor Misclassification and Compliance News: January 2021

As the independent workforce continues to grow, so do the issues of worker compliance and misclassification. It is important for enterprises to remain informed about the latest laws, regulations, and developments surrounding these topics. Each month, we’ll bring you the latest news stories from around the web.

1. Trump DOL Issues New Rule; Biden White House Freezes It

In a strange—but not entirely unexpected—turn of events, the Trump administration issued a new rule for classifying individuals as independent contractors in early January. Less than two weeks later, the new Biden administration froze the advancement of all regulatory activity, including the new rule.

On January 7, 2021, under President Trump, the United States Department of Labor (DOL) issued its final rule for classifying the status of independent contractors. The new rule was scheduled to go into effect on March 8, 2021.

The new rule reaffirmed the “economic reality” test to determine whether an individual is an independent contractor (if they are in business for themselves), or an employee and therefore economically dependent on their employer. The rule identifies two core factors:

1. The nature and degree of control over the work.

2. The worker’s opportunity for profit or loss based on initiative and/or investment.

These factors are the most probative as to whether a worker is economically dependent on an employer or is in business for themselves. If the two core factors do not point to the same classification, the following three factors may serve as additional guideposts. The factors are:

(i) The amount of skill required for the work.

(ii) The degree of permanence of the working relationship between the worker and the potential employer.

(iii) Whether the work is part of an integrated unit of production.

While the new rule made it easier for companies to classify workers as independent contractors, it didn’t last long. On January 20th, Joe Biden was sworn in as President and his chief of staff issued a memo entitled “Regulatory Freeze Pending Review,” which stopped the advancement of any rule-making activity, including the new rule governing independent contractor classification.

The Biden administration is expected to be more employee-friendly than the Trump administration and more aggressive in enforcing misclassification of workers. Many observers predicted that the Biden administration would take steps to rescind or change the new rule, but this regulatory freeze seems to have taken many observers by surprise with the immediacy of the steps.

2. California Supreme Court Says Dynamex and ABC Test Apply Retroactively

The California Supreme Court said that the Dynamex decision and the ABC test for determining if an individual was an employee or independent contractor should be applied retroactively. In April 2018, the California Supreme Court, in Dynamex Operations West Inc. v. The Superior Court of Los Angeles County, Charles Lee et al, Case No. S222732, discarded a 30-year-old standard for classifying workers and adopted a new standard—the ABC test—for determining if a worker is an employee or independent contractor. The Court abandoned the test that was set forth in S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989) and adopted a modified ABC test based on Massachusetts General Laws chapter 149, §148B.

The court said a worker is considered an independent contractor—to whom a wage order does not apply—only if the hiring entity establishes:

(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) that 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

The Dynamex ABC test was adopted by the California legislature and turned into law by AB5, which was signed by the governor. Since 2016, the ABC test has been the standard determining if an individual is an independent contractor, unless the worker fell within one of the exceptions of AB5 or AB2257, an amendment to AB5.

In its recent decision, the court addressed the question of what standard applied to misclassification cases before the Dynamex decision in 2018. Even though the standard for classifying workers was the Borello test for 30 years, the court said that the Dynamex ABC test applied retroactively. The statute of limitations will limit many of the claims for misclassification before the Dynamex decision in 2018. For those cases that have already been filed or are process, the standard is going to be the ABC test.

3. Owner-Operators and Food Distributors are Independent Contractors—For Now

In two last-minute opinion letters, the DOL said that owner-operator truck drivers and food-distributors were independent contractors. In these opinion letters, the DOL reviewed specific facts and concluded, based on the facts and using the new rule as guidance, that owner-operator truck drivers and food distributors were independent contractors. These opinion letters have limited usefulness. First, to the extent the facts in other situations are different, these opinion letters are not controlling. Second, and more importantly, these opinion letters use an analysis based on the rule proposed by the Trump administration that has been frozen by the Biden administration.

If the Biden administration adopts the new rule, which is unlikely, these opinion letters may be valuable to companies that engage with owner-operator truck drivers and food distributors in situations with similar fact patterns. A more likely scenario is that these opinion letters will be useful for a short period of time.

For more information, check out our resources page on misclassification and compliance. If you have any questions about engagement, classification, or management of your independent workforce, we’re always here to help.