Top Independent Contractor Compliance Stories from 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. 2021 was a fascinating year for independent contractor compliance. Here’s a look at some top stories.

1. Trump DOL announced new IC rule; Biden DOL freezes then rescinds the rule

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.

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.

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. Ninth Circuit Court of Appeals Reverses Lower Court’s Ruling and Says California’s Ban on Arbitration Agreements as a Condition of Employment is Permissible

The 9th Circuit Court of Appeals overruled a lower court’s decision that a California’s statute prohibiting employers from requiring employees to sign arbitration agreements was preempted by the Federal Arbitration Act (FAA). California’s AB 51 prohibits an employer from requiring that an employee to sign an arbitration agreement as a condition of employment, continued employment, or any employment-related benefit. Arbitration agreements are the best way to avoid class action lawsuits by employees and by independent contractors who allege that they were misclassified as employees. While a company can still require an independent contractor to sign an arbitration agreement, if the worker alleges that they was misclassified and should have been treated as an employee, then there may be a question about the applicability of AB51.

The Ninth Circuit Court of Appeals’ decision was issued by three judges and may be appealed to the full Ninth Circuit to review and/or ultimately to the United States Supreme Court. In the interim, companies that have employees and independent contractors sign arbitration agreements in California should review their practices to ensure that they can demonstrate that the agreements were not a condition of employment and were entered into voluntarily.

3. 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.

4. CA Court says Ballot Measure that Made App-based Drivers Independent Contractors is Unconstitutional Under California’s Constitution

A California court reviewed challenges to Proposition 22—the ballot measure that was adopted by California voters in November that made app-based drivers independent contractors—and found that it violated California’s constitution and was therefore unenforceable.

In 2020, app-based companies including Uber and Lyft drafted and collected enough signatures to put a referendum question on ballot. The ballot question, Proposition 22, said that app-based drivers were independent contractors and not employees. The ballot question passed overwhelmingly.

After the passage of Proposition 22, opponents challenged the validity of the law. The challenges were nuanced and alleged violation of parts of the California Constitution. The judge considered the arguments and concluded that Proposition 22 violated California’s Constitution.

5. 2021: Four New Labor Bills in New Jersey

Governor Phil Murphy signed four new labor bills on July 8, 2021. However, these bills do not change the ABC test or how employers should engage in classifying workers. Instead, these bills expand the Department of Labor’s enforcement powers to protect workers against unlawful misclassification and additional work-related violations, while expanding oversight and penalties.

6. 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.

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.

7. OHSA Suspends Implementation of Emergency Temporary Standard

The United States Department of Labor, Occupational Safety and Health Administration (“OSHA”) suspended activities relating to the implementation and enforcement of the COVID-19 Vaccination and Testing Emergency Temporary Standard (“ETS”) after the United States Court of Appeals for the Fifth Circuit ordered that OSHA “take no steps to implement or enforce” the ETS.

The ETS was issued by OSHA on November 4, 2021 and requires employers to implement and enforce a mandatory COVID-19 vaccination policy, with an exception for employers that instead establish, implement, and enforce a policy allowing employees to elect either to get vaccinated or to undergo weekly COVID-19 testing and wear a face covering at the workplace.

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