The U.S. Department of Labor (DOL) recently announced that it will be withdrawing its Independent Contractor Rule, effective May 6, 2021. Read below to find out how this affects Texas employers.
Why does it matter whether a worker is an employee or an independent contractor?
Under employment statutes, a worker is either categorized as an employee or an independent contractor. The distinction is important. Employment statutes generally grant protections to employees, but not to independent contractors. Under the Fair Labor Standards Act (FLSA), for example, employees are generally entitled to overtime pay for hours worked over 40 in a workweek, but contractors are not. In light of this distinction, before an employer hires a worker, it should determine whether the worker will be considered an employee or an independent contractor.
In our current moment, there have been many more instances where a worker does not cleanly fit in the independent-contractor or employee paradigm. Courts and governmental agencies promulgate various multi-factor tests to analyze whether the worker falls under the employee bucket or the independent contractor bucket. But when the factors split down the middle in application, employers are put in a tough spot. This is especially common in gig-economy positions and certain digital-worker assignments.
What did the DOL’s Independent Contractor Rule say?
In January of 2021, DOL announced a final rule (its so-called “Independent Contractor Rule”), which attempted to clarify the standards for differentiating between independent contractors from employees. The rule was intended to set forth how the DOL interprets the distinction under the FLSA.
The rule established that the ultimate question was whether the worker was economically dependent on the employer for work. To make this determination, the rule set forth two “core factors” as the most important: (1) the nature and degree of control over the work, and (2) the opportunity for profit or loss. In addition, the rule set forth three other (less relevant) factors: (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; and (3) whether the work is part of an integrated unit of production. The rule also emphasized that the actual control exercised by the employer would be more relevant that theoretical control an employer could exercise.
The DOL announced that this rule would be withdrawn, effective May 6, 2021.
What does the withdrawal of the Independent Contractor Rule mean for Texas employers?
The Independent Contractor Rule would have made the employer–independent contractor distinction easier to analyze under the FLSA, especially for employers of gig-economy positions. By designating two factors as most important, and by focusing on actual rather than theoretical control, one could say with more certainty whether a “close call” position was more likely to be fall under the independent contractor bucket or the employee bucket.
Now that the Independent Contractor Rule has been withdrawn, employers must analyze their workers’ positions under the old economic-reality test. The five non-exhaustive factors under this test initially appear similar to the Independent Contractor Rule:
(1) the degree of control exercised by the alleged employer;
(2) the extent of the relative investments of the worker and the alleged employer;
(3) the degree to which the worker’s opportunity for profit or loss is determined by the alleged employer;
(4) the skill and initiative required in performing the job; and
(5) the permanency of the relationship.
However, unlike the former Independent Contractor Rule, no one factor is given particular weight over the others.
Thus, if a Texas employer employs a worker and it is not readily apparent whether the worker is an employee or independent contractor under the five factors listed above, the employer would be well advised to consult with its labor and employment attorneys to guide it through the analysis. To the extent the employer wants the position to be properly classified as an independent contractor, employment counsel can assist in structuring the position so that it is more likely to withstand a potential challenge by the worker or a governmental agency.
What should Texas employers keep an eye out for?
This is probably not the last we will hear from the Biden administration regarding the independent contractor – employee question. During his presidential campaign, President Biden promised to work towards enacting additional worker protections, including making the “ABC test” federal law. Under this test, a worker is classified as an employee unless the employer can satisfy the three requirements: (1) the worker is free from control and direction of the employer; (2) the worker performs work that is outside the usual course of business for the employer; and (3) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. House Democrats have introduced the Protecting the Right to Organize Act of 2019 (PRO Act), which includes the ABC test. Texas employers would be well advised to monitor how this bill and others like it work their way through Congress.