Department of Labor proposes roll-back of 2021 worker classification rule.

Agency rejects ABC test as not authorized by federal law.

The Wage and Hour Division of the Department Labor, on October 13, 2022, issued a notice of proposed rulemaking to change the test for classifying workers for the purposes of applying federal minimum wage and other federal labor employment standards.

The proposal makes the test consistent with longstanding judicial precedent, examining a variety of traditional factors, including investment, permanency, whether the work is an integral part of the employer’s business, and skill and initiative, giving them equal weight according to the totality of the circumstances in a particular case. In this totality of the circumstances approach, none of the factors is more significant than another and each case is evaluated according to the overall facts in each employment situation. This test has long guided employers and agency officials in the classification of workers before the rules were changed in March of 2021.

The current, March 2021, test gives greater weight to two of the traditional factors above the others—(1) nature and degree of control over work and (2) opportunity for profit and loss. It also limits the situations in which certain other facts can be considered. The overall effect of the 2021 rule was, according to the agency, to communicate to employers “that it might be easier to classify certain workers as independent contractors rather than FLSA-covered employees,” even if the reality was that the workers ought to be considered employees.

The Department believes the return to the prior rule is necessary to discourage misclassification, which it notes is “a serious issue that denies workers’ rights and protections under federal labor standards, promotes wage theft, allows certain employers to gain an unfair advantage over law-abiding businesses, and hurts the economy at-large.”

Agency Rejects ABC Test

In its proposal, the Wage and Hour Division specifically rejected applying an ABC test under to federal law, noting that the statute (or the Supreme Court’s interpretation of the statute) would have to change to permit the agency from utilizing an ABC classification test.

As part of the proposed rulemaking, the agency considered alternative options and explained those it rejected. One such option was adopting a streamlined ABC-type test, like the test provided in California’s AB 5.[1] But, the agency acknowledges, this test does not reflect federal law and cannot be used to determine whether workers are “employees” subject to federal wage and labor laws:

Codifying an ABC test could establish a simpler and clearer standard for determining whether workers are employees or independent contractors. The ABC test only has three criteria, and no balancing of the criteria is required; all three prongs must be satisfied for a worker to qualify as an independent contractor. However, the Department believes it is legally constrained from adopting an ABC test because the Supreme Court has held that the economic reality test is the applicable standard for determining workers’ classification under the FLSA as an employee or independent contractor.

Thus, whether states adopt ABC-type tests for the purposes of classifying workers for state labor rules, the federal government cannot use the ABC test to classify workers for federal minimum wage and other labor laws under the Fair Labor Standards Act.

TCLF Analysis

The current economic realities test could accurately classify a worker under the facts of some employment circumstances. But it has not been in place long enough (since March 2021) for the agency or the courts to develop many examples of its application to fully understand its strengths and limitations. The former/proposed rule allows for the same two economic realities test factors to be considered in the appropriate factual situations, but also allows other factors that may be appropriately considered under different factual situations.

The battle between proponents of different worker classification tests is sometimes inaccurately viewed as being pro- or anti- employee or independent contractor. In reality, the competing standards battle is being waged by some regulators and labor organizations on one side and companies on the other, not by the workers themselves. Workers are best served when there is an appropriate balance between the two sides.

Workers whose activities are tightly controlled by a company should be considered employees and receive employee benefits, and workers who truly have the freedom to manage their own businesses should be considered independent contractors. This distinction gets muddied when a company begins to tightly control the activities of workers that it wants to treat as independent contractors in order to avoid paying them employee benefits. Such relationships have led to the abuse of workers who are neither truly free to run a business nor compensated like an employee for their work.

The issue is further complicated when regulators and labor unions try to come to the aid of abused workers and propose changes to the classification analysis, such as the ABC test, that are so broad that they end up classifying true independent contractor businesses as employees. This effectively terminates the very businesses that true independent contractors have created and grown through their own hard work and competitiveness.

Perhaps the solution to today’s worker classification disputes would be found in making the rule clearer to strike the appropriate balance, rather than in proposals that tilt the test too far in either direction. This need for such a balance was discussed in an amicus brief filed earlier this year by The Cullen Law Firm, PLLC, before the National Labor Relations Board on behalf of the Owner-Operator Independent Drivers Association Inc, which can be found here. (The Atlanta Opera, Inc. and Make-Up Artists and Hair Stylists Union, Local 798, IATSE, National Labor Relations Board, Case 10–RC–276292). The classification test that would be in the best interest of employees and independent contractors would be one that gives companies a clear mandate to provide employee benefits to individuals whose work they largely control and at the same time clearly warns companies from encroaching on its independent contractors’ businesses by demanding unreasonable control over their businesses. Both of these circumstances can be remedied by the factors considered under the “totality of the circumstances” test in the proposed rule, and under facts found, in some work arrangements, by the two factors identified under the current rule. The current and proposed rules are not different enough to change the result in many classification disputes. By seeking to return to the long-standing classification test, the agency recognizes that more dramatic proposals, like the ABC test, must come from the legislature rather than agency action.

The proposed rule can be read here.

For more information about the proposed rule change or driver classification, contact info@cullenlaw.com

[1] As described by the California Supreme Court in Dynamex Operations W., Inc. v. Superior Court, ‘‘[t]he ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (b) that the worker performs work that is outside the usual course of the hiring entity’s business; and (c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.” 416 P.3d 1, 34 (Cal. 2018).