Characterizing someone as an independent contractor or an employee can have significant monetary consequences.  Under the Fair Labor Standards Act (FLSA), employees are entitled to benefits including overtime pay and minimum wage. Independent contractors, however, are not. As a result, the distinction between an employee and an independent contractor can be an important determination for a business to make.

Traditionally, courts have applied a multi-factor test, known as the economic realities test, to “determine whether, as a matter of economic reality, an individual is in business for himself or herself as an independent contractor or is an employee of another.” Because courts have applied the test inconsistently, the distinction between independent contractors and employees has remained unclear.

To clarify the application of the economic realities test, the Trump Administration’s Department of Labor (DOL) promulgated the Independent Contractor Rule. Under the Independent Contractor Rule, a worker’s status primarily depends upon two “core” factors, including:

1. The nature and degree of control over the work, and
2. The worker’s opportunity for profit or loss based on initiative and investment.

In addition, three other factors serve as guideposts for determining a worker’s status. These guideposts include the following:

1. The amount of skill required for the work,
2. The degree of permanence of the working relationship between the worker and potential employer, and
3. Whether the work is part of an integrated unit of production (or the individual works under circumstances analogous to a production line).

Shortly after President Biden took office, the DOL postponed the March 8, 2021 effective date of the Independent Contractor Rule. The DOL subsequently withdrew the Independent Contractor Rule altogether. Although the DOL did not create a replacement test, the Biden Administration has expressed support for a more stringent ABC test.

Under the ABC test, a worker must satisfy all of the following factors to be classified as an independent contractor:

1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work.
2.  The worker performs tasks that are outside the usual course of the hiring entity’s business.
3. 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.

Several business groups sued the DOL, claiming it failed to comply with the Administrative Procedure Act’s (APA) rule making process. In March 2022, the U.S. District Court for the Eastern District of Texas issued its ruling in the case. First, the Court ruled that the DOL did not comply with the APA’s rule making procedures when it postponed the effective date of the Independent Contractor Rule because it did not provide the public with a meaningful opportunity to comment on the delay. Second, the Court determined the DOL’s withdrawal of the Independent Contractor Rule was arbitrary and capricious because the DOL did not consider potential alternatives to withdrawing the Rule. As a result, the Court reinstated the Independent Contractor Rule.

While the reinstatement of the Independent Contractor Rule provides businesses with welcome clarity, it remains unclear whether the Biden Administration will appeal the ruling. It remains to be seen whether the DOL will attempt to use the formal rulemaking process to alter the Independent Contractor Rule or adopt a new rule, as the Court provided several potential alternative policies the DOL could have considered in its decision to withdrawal the Independent Contractor Rule. Employers should continue to monitor the Biden Administration’s attempts to challenge the Court’s ruling or issue a new rule. Employers should also be cognizant of state laws, as the Independent Contractor Rule does not affect how states classify workers.

The attorneys in our Austin and Dallas offices are available to answer any employment-related questions you may have.  Please contact us at info@gstexlaw.com.

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