This week, a federal judge in Texas issued an order that effectively reinstated independent contractor regulations that were issued at the end of the Trump Administration but never took effect.
As a result of the court’s decision, the more business-friendly Trump regulations are in place. But we do expect the Biden Administration to appeal the court’s decision and, in the meantime, to withdraw the Trump regulations in a way that will be less vulnerable to legal challenge.
In early January 2021, the outgoing Trump Administration issued regulations pertaining to the definition of “independent contractor.” Among other things, the regulations, which were scheduled to take effect on March 8, 2021, would have made it easier for the U.S. Department of Labor to find that a worker was an independent contractor rather than an employee.
On February 5, 2021, shortly after President Biden took office, his administration issued a proposed regulation that would “delay” the effective date of the independent contractor regulations for 60 days. The proposed regulation included a 19-day comment period, but the content of comments was limited to whether the delay was advisable. The DOL specifically said that it would not consider any comments related to the merits of the Trump Administration regulations. On March 4, 2021, the DOL delayed the Trump regulations for 60 days, or through May 7, 2021.
Then, on March 12, 2021, the Biden Administration issued proposed regulations that would withdraw the Trump regulations entirely. On May 6, 2021, final regulations were issued that withdrew the regulations effective immediately.
A number of business groups sued the DOL, alleging that the Biden Administration’s actions did not comply with the requirements of the Administrative Procedure Act, which very generally requires that government agencies provide adequate notice and a meaningful opportunity for the public to comment before regulations are issued. In addition to failing to provide this opportunity, the plaintiffs argued, the DOL failed to consider more moderate alternatives to complete rescission of the independent contractor regulations. Both the plaintiffs and the DOL filed motions for summary judgment. On Monday, U.S. District Court Judge Marcia Crone sided with the plaintiffs, and vacated all of the Biden Administration regulations on this subject. The result is that the Trump regulations are in place until further notice.
“Independent contractor” under the Trump standard
The Trump regulations reaffirm an “economic reality” test for determining whether a worker is an independent contractor or an employee, with the focus on two “core factors” that carry the most weight. Those factors are (1) the nature and degree of control over the work performed, and (2) the worker’s opportunity for profit or loss. With respect to the first factor, independent contractor status would be found depending upon the extent to which the worker exercised substantial control over key aspects of the performance of the work, such as by setting his or her own schedule. Under the second factor, a worker would have been found to be an independent contractor if he or she had an opportunity to earn profits or incur losses based on either (1) the exercise of initiative, or (2) the investment in or capital expenditures on, for example, helpers, equipment, or material to further the work.
In a DOL press release issued on May 5, 2021, the Biden Administration said that it withdrew the Trump regulations primarily for the following reasons:
The Trump regulations were in tension with the text and purpose of the Fair Labor Standards Act, as well as relevant judicial precedent.
The Trump regulations prioritized the two “core factors” for determining employee status under the FLSA, which would have undermined the longstanding balancing approach of the “economic realities test” as well as court decisions requiring a review of the “totality of the circumstances” related to the employment relationship.
The Trump regulations would have narrowed the facts and considerations comprising the analysis of whether a worker is an employee or an independent contractor, resulting in workers’ losing FLSA protections.
(Quoted from the press release with minor edits.)
Since the withdrawal, the Biden Administration has returned to assessing independent contractor status using a standard under which it is very unlikely that a worker will be found to be an independent contractor.
Implications of this week’s court decision
The court’s decision is good news for businesses who preferred the Trump Administration’s approach to determining whether a worker is an independent contractor versus an employee. But there are at least two reasons to view this as only a fleeting victory.
First, the DOL is almost certain to appeal Judge Crone’s decision to the U.S. Court of Appeals for the Fifth Circuit. Although the Fifth Circuit may affirm, it is also possible that it will reverse. If so, the Biden withdrawal will go back into effect.
Second, and more importantly from a practical standpoint, the Biden DOL is likely to issue new regulations proposing to withdraw the Trump regulations while its appeal is pending. This time, the DOL can provide a more generous comment period and accept and consider comments about the merits of the Trump regulations. In other words, the DOL can have a “do-over,” and if it does so correctly, it can withdraw the Trump regulations again, this time with a much better chance of success in the event of another legal challenge.
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