Independent Contractor Misclassification and Compliance News May 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. United States Department of Labor Withdraws Independent Contractor Rule

On January 7, 2021, the United States Department of Labor (DOL) issued its rule on the status of independent contractors. The new rule was scheduled to go into effect on March 8, 2021. The Biden Administration froze the rule, delayed it, and then withdrew it in May.

The new rule would have reaffirmed the “economic reality” test to determine whether an individual is an independent contractor if they are in business for themselves or are an employee and economically dependent on an employer. The rule identified 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 or not a worker is economically dependent on someone else’s business 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:

1. The amount of skill required for the work.
2. The degree of permanence of the working relationship between the worker and the potential employer.
3. Whether the work is part of an integrated unit of production.

Commentators disagreed as to how much of an effect the new rule would have. Some said that it would make it easier to classify workers as independent contractors, while others thought it was sufficiently similar to the current interpretation by many courts that its effect would have been minimal. In any case, the rule has been withdrawn and observers expect the Biden Administration to aggressively go after employers who misclassify workers.

2. Ninth Circuit Says Federal Aviation Administration Authorization Act (FAAAA) Does Not Preempt California’s AB5 Law, Creating a Conflict with First Circuit’s Interpretation

The Ninth Circuit Court of Appeals reviewed whether the Federal Aviation Administration Authorization Act (FAAAA) preempted California’s AB5 law which says that a worker is an employee unless the hiring business can meet the ABC test. The ABC requires the hiring business to demonstrate:

1. The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
2. The person performs work that is outside the usual course of the hiring entity’s business;
3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The FAAAA prohibits state laws that relate to “price, route, or service of any motor carrier…with respect to transportation of property.” The Ninth Circuit said that AB5 was a “generally applicable” law that did not relate to “price, route, or service of any motor carrier.”

The Ninth Circuit’s decision is a different conclusion than the one reached by the First Circuit Court of Appeals in 2016. At the time, the First Circuit Court of Appeals said that the FAAAA preempted the B part of the test because the application of the B prong, “would both expressly reference and have a significant impact” on a company’s prices, routes, or services.

The conflicting conclusions reached by the First and Ninth Circuit Courts of Appeals may simply result in businesses having to operate differently in Massachusetts and California, or a party may appeal or another case may arise in which a party appeals to the Supreme Court to resolve the conflict.

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.