Department of Labor Proposed Rule Takes Aim at Independent Contractors

Last week, the Department of Labor released a long-expected proposed rule that attempts to more clearly define the characteristic and status of independent contractors — a category that includes the construction industry and realtors. That designation of self-employed people goes far beyond the example of gig platform workers, like rideshare drivers. Although estimates vary, the numbers typically run into the tens of millions and include many in the commercial real estate industry.

The concern on the part of many is that the new rule, though a combination of suggestive wording and DOL interpretation, tries to implement a controversial strategy. President Biden, even during his campaign as well as during his tenure in office, and many Democrats and unions have championed a standard that would effectively eliminate much legitimate independent contractor business under the claim of protecting workers.

This ultimately is an outgrowth of California’s AB5 bill from 2019 that went into effect 2020. That law, using the dated so-called ABC test from the 1930s, presumed that all people working were employees unless proven otherwise. Governing status was a three-part test in which the worker is free from the control of the hiring entity, the worker performs duties outside of the usual course of the hiring entity’s business, and the worker is engaged in an independently established occupation or trade that is the same as the work being performed.

The law, pushed through by unions and union-affiliated legislators, used employee mischaracterization as its rationalization. There is a long history of companies treating people who should be employees as independent contractors to avoid such things as payroll taxes, benefits provision, and regulatory compliance. Federal and state statutes already prohibit the practice and labor regulators regularly take against companies that break such laws, though there is a question of whether they have the resources to more fully address the issue.

There are also political concerns that split on Democratic/Republican, labor/management lines. As many companies want to reduce financial burdens of having employees, many unions want to create conditions under which companies can’t use workers outside of union ranks, reducing competition for work.

Ultimately, California effectively put many self-employed people out of business as clients in the state, wary of draconian penalties, wouldn’t do business with them. The legislature ultimately put in many exemptions by profession into the law and there were numerous legal challenges.

Some other states tried to implement similar legislation, a notable example being New Jersey in which the Senate president, who was also a full-time high-ranking union official, tried to push a measure through but was ultimately stopped by grassroots efforts by multiple independent contractor and corporate employer groups.

At the same time, Democrats and unions had tried to push through the PRO Act, an attempt to modify the National Labor Relations Act and make union organizing easier. The PRO Act also included the ABC test to treat independent contractors as workers in the light of unionization. But there were lawyers, representing corporations on one side and employees and unions on the other, who said the inclusion could potentially allow courts to impose the standards in other areas of law. The biggest concern of many was the potential effect on the basic law of employment, the Fair Labor Standards Act of 1938, which has never included a definition of independent contractor status.

The PRO Act became a big “must” for unions that had heavily supported Democratic candidates for years. Although it passed in a House Democratic majority, it stalled in the 50-50 count of the Senate in which a filibuster could easily torpedo a bill. So, when the Biden administration came in, it withdrew a rule under Trump’s DOL that would have made it easier for businesses to treat someone as an independent contractor. Instead, it planned a new rule, which is what was finally released last week.

The filing for the rule explicitly said the agency considered including the ABC test but realized it likely lacked the legal authority to do so. Instead, there is a proposed multi-part “economics reality” test. But as multiple experts have noted, the language, along with the examples of how the DOL would interpret the rule, “clearly aims to place a thumb on the scale in favor of more workers being deemed employees under the FLSA,” as lawyers from management-side employment and labor law firm Seyfarth Shaw wrote.

“[T]hese tests — which date back to 1947 — do not adequately account for the growth of the gig economy, the increased desire among workers to control their work hours to ensure a work-life balance, and the evolution of the modern workplace to one in which workers rarely retain one full-time job throughout their working years, which cumulatively  have contributed to a greater demand for the flexibility that comes with and independent contractor relationships,” the lawyers wrote.

If put into effect, the rule could force companies to treat many people, traditionally independent agents, as employees. That would include the construction industry and realtors.

The DOL is accepting comments on the ruling from the public through November 28, 2022.