Court Retroactively Reinstates Independent Contractor Final Rule

In early 2021, the new Biden administration delayed and then formally withdrew the Trump administration’s final “Independent Contractor Rule” that would have altered the way businesses determine whether it’s appropriate to classify someone as an independent contractor.

On March 14, 2022, Judge Marcia Crone of the US District Court for the Eastern District of Texas reinstated the Independent Contractor Rule.  Judge Crone found the Department of Labor (DOL) had violated the Administrative Procedure Act (APA) requirements twice:

• Once when it delayed the Independent Contractor Rule in February 2021 slated to take effect shortly after President Biden took office
  • A short 19-day public comment period was provided following the announced intent to delay, and once the “Delay Rule” was official, it was effective immediately
• And again when it withdrew the Independent Contractor Rule without utilizing the formal rule-making process (a proposed rule and public comment period followed eventually by a final rule clearly addressing stakeholder comments)
  • The Court deemed the “Withdrawal Rule” arbitrary and capricious, as it merely sought to unwind the prior administration’s rule without attempting to address the clear deficiencies it was designed to assist employers and workers (and courts) resolve

Here is some of the language from the Court decision:

• With respect to the Delay Rule:
  • The Independent Contractor Rule was properly promulgated using the notice-and-comment process. Because the DOL must use “the same procedures when [it] amend[s] or repeal[s] [the Independent Contractor Rule] as [it] used to issue the rule in the first instance,” the DOL was also required to promulgate the Delay Rule using the notice-and-comment procedure.
  • The Delay Rule’s “content restriction was so severe in scope” that there was no meaningful opportunity for comment, thereby violating the APA.
  • In sum, the court determines that the DOL did not have good cause to shorten the comment period, which, along with the content restriction, prevented a meaningful opportunity for comment. Similarly, the court finds that good cause does not exist to bypass the 30-day waiting period required for the Delay Rule. For these reasons, the promulgation of the Delay Rule violated the APA, and the rule is vacated.
• With respect to the Withdrawal Rule:
  • In short, agency action is arbitrary and capricious when the agency considers only the binary choice of whether to retain or rescind a policy, without also “considering less disruptive alternatives.”
  • By prohibiting comments on regulations to replace the Independent Contractor Rule, the DOL refused to “meaningfully consider more limited policies” than the total withdrawal of the Independent Contractor Rule.
  • By refusing to consider alternatives to the total withdrawal of the Independent Contractor Rule, the DOL failed to “consider important aspects of the problem before [it]”—the lack of clarity of the economic realities test and the need for regulatory certainty.
• In sum, the court concludes that the Delay Rule violated the procedural requirements of the APA. The court further finds that the Withdrawal Rule is arbitrary and capricious. Consequently, both the Delay and Withdrawal Rules violate the APA and are vacated.
• Therefore, the Independent Contractor Rule, Independent Contractor Status Under the Fair Labor Standards Act, 86 Fed. Reg. 1,168 (Jan. 7, 2021), became effective as of March 8, 2021, the rule’s original effective date, and remains in effect.

The Independent Contractor Rule was an attempt to condense and align the numerous economic realities test inconsistencies which have arisen from various courts over decades of case law.  In contrast to the seven factors used in various ways across the nation, the new rule prioritizes two “core factors” and offers 3 additional guideposts for consideration when necessary (with a caveat that this is not an exhaustive list of factors for consideration).

Below are the new economic realities test factors (with 1 and 2 as “core factors” intended to “typically (but not necessarily) carry greater weight”):

1. the nature and degree of control over the work
2. the individual’s opportunity for profit or loss
3. the amount of skill required for the work
4. the degree of permanence of the working relationship between the individual and the potential employer
5. whether the work is part of an integrated unit of production

This is how the Independent Contractor Rule explains the importance of the first two core factors:

Given these two core factors’ greater probative value, if they both point towards the same classification, whether employee or independent contractor, there is a substantial likelihood that is the individual’s accurate classification. This is because other factors are less probative and, in some cases, may not be probative at all, and thus are highly unlikely, either individually or collectively, to outweigh the combined probative value of the two core factors.

Now that the Independent Contractor Rule is effective retroactively to March 8, 2021, this will be meaningful for employers in determining their group size so they can ensure compliance with various laws.  The rule has broad reach, addressing protections under the Fair Labor Standards Act (FLSA), Family and Medical Leave Act (FMLA), and Occupational Safety and Health Act (OSHA), as well as potentially impacting applicable large employer (ALE) status under the Affordable Care Act (ACA) and identifying for whom an offer of health insurance coverage must be provided.

We will see how the Biden administration responds, including any appeal they might file.  Of course, employers should also be cognizant of any state laws which might apply additional considerations.  Misclassification of workers is a primary enforcement area for all levels of government (including the National Labor Relations Board, the IRS, and roughly half of the states) to safeguard worker protections.

 

Written by: KC Rippstein

 

IMA will continue to monitor regulator guidance and offer meaningful, practical, timely information.

This material should not be considered as a substitute for legal, tax and/or actuarial advice. Contact the appropriate professional counsel for such matters. These materials are not exhaustive and are subject to possible changes in applicable laws, rules, and regulations and their interpretations.