As predicted, the DOL under the Biden administration has withdrawn the latest Independent Contractor rule, before it even went into effect. The DOL cited three main reasons for withdrawing the rule:
- The rule’s standard had never been used by any US court and did not support the FLSA’s text or purpose.
- The rule did not provide the intended clarify for employers or courts to analyze proper classification.
- The DOL elevated certain “more important” economic realities over others, without a clear basis for making that determination. The Rule placed more emphasis on control and it altered other factors typically considered by courts – the DOL found the test would improperly narrow the facts to be considered in the application of the economic realities test, contrary to the FLSA’s more expansive conception of the employment relationship.
Most Federal courts follow a version of the “Economic Reality” test expressed in this withdrawn rule – and each court will continue to follow those individual tests. But Federal law is not the only compliance concern for classifying employees. States can and do have stricter tests regarding independent contractor classification.
California’s ABC test is one of the strongest in the country and Massachusetts and other states have followed suit with equally strong tests. President Biden anticipates announcing a new Independent Contractor test that is equal to California and Massachusetts’ protections.
The ABC test is strict. An employer must classify a worker as an employee, unless the worker meets all of the conditions of the ABC test below:
- The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The person performs work that is outside the usual course of the hiring entity’s business; and
- The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Looking into our crystal ball, we expect President Biden to announce a proposed rule to incorporate this test at the Federal level in the coming months.
Misclassification can be an expensive mistake. We expect to see more enforcement of misclassification at the state and federal level, which is a revenue generator for government.
Remember, there is no defense to wrongly classifying your workers– just penalties, fines and back taxes. We recommend taking a look at your workforce, using our Independent Contractor Classification Audit. Like all of our fixed fee services, the Independent Contractor Classification Audit is user friendly.
If you have independent contractors at your organization, contact us. We can help.