Challenges to DOL’s Contractor Rule: Mounting Lawsuits Explained

The US Department of Labor’s new worker classification rule is facing at least four lawsuits alleging the regulation is illegal, with less than a week before the new policy is set to go into effect.

Freelance writers, a trucking company, and groups representing construction, financial services, and tech companies have filed four separate legal challenges in federal district court in Texas, Georgia, Tennessee, and Louisiana contending the new standard, which will make it harder for businesses to use independent contractors, violates the Administrative Procedure Act and departs from the text of the Fair Labor Standards Act.

The growing pile of lawsuits threatens to disrupt the Biden administration’s implementation of the new rule due to take effect March 11. The DOL says the regulatory update will better protect workers from misclassification, but the business community warns it could have major consequences for industries that rely on independent contractors to operate their services—like Uber Technologies Inc. and Lyft Inc., as well as the trucking, construction, and other sectors.

And the multi-district nature of the litigation also could lead to splits among the district and appellate courts, inviting potential US Supreme Court review.

1. What does the DOL rule do?

Whether a worker is classified as an independent contractor or an employee can present a host of legal and tax responsibilities for a business.

Workers who are considered employees are protected by most federal labor laws, including the minimum wage and overtime rules policed by the DOL. Independent contractors, on the other hand, are considered to be in business for themselves and aren’t covered under those rules.

The latest DOL rule is expected to generally make it harder for workers to be considered independent contractors, but the Biden administration has vowed it won’t result in widespread changes to worker classification across the economy and instead relies on historic case law.

The new rule issued by the Labor Department in January outlines six non-exhaustive factors that the agency will consider in the relationship between a worker and a company when determining how a worker should be treated for purposes of the minimum wage and overtime requirements of the FLSA.

It also would cancel a more business-friendly contractor standard finalized by the Trump administration in January 2021 that outlined a simpler classification test focusing more on how much control workers have over their duties and their opportunities for earnings.

The agency has defended the new rule as “aligned with the Department’s decades-long approach (prior to the 2021 IC Rule) as well as with federal appellate case law,” and one that “is more consistent with the Act’s text and purpose as interpreted by the courts,” compared to the Trump administration’s classification rule.

2. What are the legal challenges against the rule?

Freelancers and businesses that rely on independent contractors have filed four separate suits against the DOL rule, arguing that the new standard is an arbitrary and capricious policy change that violates the APA.

“In practice, the 2024 Rule will force freelancers to enter undesirable employment relationships or to refrain from working at all,” according to a complaint filed by Nashville, Tenn.-based freelance writers Margaret Littman and Jennifer Chesak in federal court in Tennessee Feb. 21.

That lawsuit contends that the DOL ran afoul of the APA because it “failed to provide a reasoned explanation” for changing its approach to worker classification. The new rule also “deviates” from the meaning of the FLSA, and thus goes beyond the agency’s statutory authority, the freelancers’ complaint said.

Nearly identical arguments were made against the rule in a legal challenge filed by Frisard’s Transporation LLC in a federal court in Louisiana Feb. 8, and a separate lawsuit filed by another group of freelance writers in a Georgia federal court in January.

The Nashville freelancers also argue that the new rule violates the US Constitution’s non-delegation doctrine, which prohibits Congress from delegating its lawmaking powers to other entities and has become a common argument lodged by opponents of agency regulations.

3. What about previous litigation?

Business groups have been successful in blocking the Biden administration’s attempts to regulate on worker classification in the past.

In 2022, a Texas federal judge agreed with arguments made by Coalition for Workforce Innovation, Associated Builders and Contractors Inc., and the Financial Services Institute that an earlier 2021 Biden rule on worker classification was invalid because the agency failed to consider alternatives to the rulemaking. Like the 2024 contractor rule, the 2021 rule sought to cancel the Trump classification standard.

That legal challenge had been paused in the US Court of Appeals for the Fifth Circuit while the DOL developed the new rulemaking, but the business groups have since been given the green light to update the case with their fresh legal concerns in the wake of the 2024 rule.

The Fifth Circuit in February granted the group’s uncommon request to renew their lawsuit in the US District Court for the Eastern District of Texas, putting the case before the same venue that sided with the coalition in 2022.

While the business groups haven’t yet amended their complaint, their request for remand suggested that the new 2024 rule also creates fresh legal questions under the APA.

The groups said the rule “fails to provide any meaningful analysis of alternatives to wholly replacing the 2021 Independent Contractor Rule,” and should be reviewed to see if the DOL complied with the APA when issuing the 2024 rule.

4. What’s next?

Notably, not one of the plaintiffs in the four cases so far has requested to delay the effective date of the rule, which is set to go into effect March 11.

Instead, the groups have requested the courts issue injunctions to prevent the DOL from enforcing the rule and to issue a ruling setting aside the rulemaking as unlawful.

While the groups have noted the approaching effective date and requested that the courts consider their requests expeditiously, it’s possible the rule will go into effect before the courts can weigh the merits of those legal arguments and cause some regulatory whiplash if a court were to block the agency from enforcing the rule later down the road.

The cases are Littman v. DOL, M.D. Tenn., No. 3:24-cv-00194; Frisard’s Transp., L.L.C. v. DOL, E.D. La., No. 2:24-cv-00347; Coal. for Workforce Innovation v. Walsh, E.D. Tex., No. 1:21-cv-00130; and Warren v. DOL, N.D. Ga., No. 2:24-cv-00007.