Over the past several years, the issue of the proper classification of gig workers as independent contractors has been heavily litigated. Countless employers welcomed the Trump administration’s efforts to adopt a simple, straight forward test to satisfy the legal requirements of classifying workers as independent contractors. The new test was aimed at reducing litigation over misclassification of independent contractors.
Misclassification lawsuits typically seek recovery of wages based on allegations that workers did not get paid at least minimum wage and overtime, among other employee protections that do not extend to independent contractors. Simply put, the Trump test would have made it easier for employers to properly classify workers as independent contractors.
Not surprising, the Biden administration rescinded the Trump test on May 5. There is a clear split between groups who believe workers should have the flexibility and control afforded under the independent contractor classification and groups who believe the independent contractor classification is another method of employer abuse. Some simply believe that it all comes down to payment of taxes.
In any event, gig workers are at the center of this controversy. So, what does the Biden administration’s rescission mean for them and what does it mean for employers of gig workers?
Withdrawing the rule did not create a new test for determining whether a worker is an employee or independent contractor. Instead, employers must resort back to the economic realities test to determine whether a worker may be properly classified as an independent contractor. Historically, courts have applied the economic realities test in analyzing misclassification claims under the Fair Labor Standards Act.
The Economic Realities Test
The economic realities test is a multi-factor balancing test to assess whether a worker, as a matter of economic reality, is economically dependent on the employer or is in business for him/herself. The Department of Labor’s Wage and Hour Division and the U.S. courts of appeals generally consider and balance the following factors:
- The nature and degree of the employer’s control over the work;
- The permanency of the worker’s relationship with the employer;
- The degree of skill, initiative, and judgment required for the work;
- The worker’s investment in equipment or materials necessary for the work;
- The worker’s opportunity for profit or loss;
- Whether the service rendered by the worker is an integral part of the employer’s business; and
- The degree of independent business organization and operation.
No single factor is determinative. Rather, courts analyze these factors based on the totality of the circumstances to determine if a worker is an employee or independent contractor.
Notably, the Trump-era rule focused on two core factors—the worker’s opportunity for profit and the worker’s control over the work. The latter is a complete 180 from the economic realities test. The withdrawal of Trump-era independent contractor rule has no real impact on employers because the rule had not yet gone into effect prior to withdrawal. Thus, employers simply continue applying the economic realities test.
VIDEO: App-based companies and state governments are at odds over how to properly classify gig economy workers.
What Now for Employers?
While the economic realities test is unclear and complicated to many, and it is also subject to contradictory case law, employers must continue applying the test to the classification of workers. Employers must also ensure compliance with state and local laws regarding the classifications of workers.
Some states have employee-friendly standards for determining whether a worker is an employee or independent contractor. For example, states like California, Illinois, Massachusetts, and New Jersey use the “ABC test,” which includes the presumption that a worker is an employee and puts the burden on the hiring entity to demonstrate that the worker is an independent contractor.
The withdrawal of the Trump-era rule and the roll out of the ABC test in other states have dealt significant blows to employers, gig workers, and small business owners who previously enjoyed greater flexibility to design the terms of their commercial relationship. This legal trend confirms that independent contracting relationships will continue to be met with a high level of scrutiny and suspicion by courts and governmental agencies.
Employers must tread carefully when classifying workers as independent contractors considering the potential liability for misclassification along with the significant legal expense to defend against misclassification claims.
Those business entities that were counting on the Trump-era rule to classify workers as independent contractors must re-evaluate their business plans. If workers do not meet the economic realities test, companies must account for the added operating expenses, such as workers’ compensation insurance, employer side taxes, health insurance, sick pay, hourly wages and overtime, among other things.
Additionally, companies must also ensure that they fully comply with all other federal, state, and local laws that protect employees. Best practices to avoid misclassification liability include conducting self-audits.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Nancy N. (“Niki”) Lubrano is partner at CDF Labor Law, a California-based labor, employment and immigration law firm. She defends employers against all types of employment-related claims, including wage and hour class action claims and she is one of the few attorneys who has litigated Private Attorneys General Act claims through trial. She also regularly advises executives and human resources personnel on preventative measures to avoid litigation.
Adelyn M. Vigran is an attorney at CDF Labor Law where she defends and advises California businesses in all aspects of labor and employment law. Her litigation experience involves claims of wrongful termination, harassment, discrimination, retaliation, trade secret theft, unfair competition, and wage and hour violations.