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Trump Independent Contractor Rule Stalled by Agency Discord

Aug. 13, 2020, 7:28 PM

The Labor Department’s race against the election-year calendar to craft a rule that would set parameters for when businesses can classify workers as independent contractors is jeopardized by an internal conflict over its legality and concerns that the November election’s results could doom the project.

Fast-tracking a rulemaking so that it could take effect before Inauguration Day in January is a priority for DOL leadership due to the possibility of the White House switching hands. A proposed rule was completed in May, but has been in a holding pattern because of discord among DOL officials and attorneys about the legal standing of what would be a significant change to the Fair Labor Standards Act, according to five sources briefed on the internal process who spoke on condition of anonymity.

Labor unions and Democrats, including presumptive Democratic presidential nominee Joe Biden, would be motivated to oppose a finalized rule on legal and policy grounds. They would prefer the federal government make it far more difficult for companies to consider workers as independent contractors, a designation that denies them minimum wages, overtime, and other protections employees receive.

With Election Day fast approaching, business lobbyists and management attorneys are growing impatient for DOL to release a proposal—and some have started to caution agency leaders that political developments may soon create a situation where shelving the initiative would be the best course for employers. Legal questions surrounding independent contractor status affect industries across the economy, and the gig economy’s rise has complicated the issue. Employers want a rule that would shield them from lawsuits and federal investigations that allege they are on the hook for significant back wages because their workers are improperly classified as independent contractors.

“In my view, certainly the sooner the better,” Russ Hollrah, who lobbies for businesses as head of the Coalition to Promote Independent Entrepreneurs, said in reference to DOL releasing the proposal. “This is an area where it really would be helpful for regulations to be issued just to provide clarity to the independent entrepreneurs as well as their clients, so they have a higher degree of certainty that the contracted relationships they entered into will be respected.”

Deputy Labor Secretary Patrick Pizzella, an aggressive pro-business proponent of deregulation, is pushing for the rulemaking to be accelerated. And some parts of the business lobby want Labor Secretary Eugene Scalia, a veteran regulatory and employment law litigator for corporations, to resolve the legal clash and advance the regulation, three of the sources said.

“The Department of Labor is rapidly working to complete its full regulatory agenda,” Pizzella said in a prepared statement to Bloomberg Law. “The Department works through a robust internal process on regulations and, in this matter, is committed to complete independent contractor regulatory issues by the end of the first term.”

DOL brass views the rulemaking, which has yet to be sent to the White House for review, as an opportunity to cement President Donald Trump’s workplace policy legacy by checking blue-state momentum behind expanding the legal interpretation of an employee. Yet some employer advocates are warning DOL officials that Democrats could easily repeal the rule next year and close off future efforts to advance a pro-business regulatory approach if Trump loses in November and Democrats seize control of the Senate.

The Biden Factor

The Trump administration’s desire for an independent contractor rule didn’t come to fruition under Trump’s first labor secretary, the more moderate and legally cautious Alexander Acosta. Now, despite the department’s late-term emphasis on advancing the rule, the internal dispute that has delayed its release poses risks for Republicans because of Trump’s sagging poll numbers.

The general fear is that trying to finalize the rule this late in an election year could set the table for a potential Biden administration to take the regulation in the opposite direction, the sources said. That’s why business representatives close to the administration have advised the department to release the rule and put it through the public comment process but await the election’s results before moving to finalize it.

If Trump is re-elected, the department could simply publish a final rule whenever it’s ready. And if Trump loses and Republicans retain a Senate majority of at least 51 seats, DOL could jam through a regulation in the administration’s final weeks.

But if Biden is victorious and his party wins the Senate, Democrats could use the Congressional Review Act to invalidate the rule and bar a future DOL from issuing another regulation in “substantially the same form.”

A newly convened Congress next year could use that law to disapprove any rule finalized in the last 60 legislative days of 2020. While the deadline for safeguarding rules from this process is a moving target due to the congressional calendar being in flux, any final rule on independent contracting would almost certainly be open to CRA action.

Biden has already indicated his preference. He tweeted support in May for the union-backed, expansive definition of employee that California adopted last year. That law, known as Assembly Bill 5, designates workers as employees if their work is controlled by the company and isn’t outside the usual course of its business, and if they don’t independently run a similar business.

Rule Versus Legislation

DOL hasn’t elaborated on how it plans to draw the line between employee and independent contractor, beyond saying the rule would be deregulatory and clarify terms under the FLSA. Scalia briefly described the plan last month.

“California radically changed its law with AB5, as many of you know,” he told the conservative American Legislative Exchange Council during a virtual conference. “We’ll look to provide clarity and commonsense on this issue.”

But by going the regulatory route, DOL is wading into legally murky territory, a complexity that likely explains why DOL attorneys are preventing the rule from being released.

The Obama administration actively enforced contractor misclassification but didn’t pursue a regulation because the DOL Office of the Solicitor concluded that it was up to Congress to pass legislation interpreting employee status under the FLSA and for courts to set boundaries through case law, two former Obama DOL officials told Bloomberg Law. Instead, the Obama DOL issued guidance outlining a wide interpretation under the law.

Some of the same career DOL lawyers who helped formulate the Obama administration’s approach still work at the department and remain responsible for advising the Trump administration on the matter.

“I would not think that the courts would be moved by this last-minute, clearly political turn by the Trump administration to try to get a favorable interpretation for companies that want to continue misclassifying their workers as independent contractors,” said Shannon Liss-Riordan, a plaintiffs’ attorney who has represented many gig-economy workers in lawsuits alleging misclassification. “Congress is responsible for the FLSA.”

To that end, Liss-Riordan said she’s in discussions with Sen. Elizabeth Warren (D-Mass.) about potentially introducing a bill that would amend the FLSA by incorporating California’s test for defining employee status.

Passing a sweeping change to the New Deal-era wage law could be a challenge on Capitol Hill regardless of party control, but that’s exactly the type of development business leaders want to avoid.

“Don’t give up. There’s still a small window, albeit it’s closer and closer to closing each day,” Roger King, senior labor and employment counsel for the HR Policy Association, said about the DOL rule. “Let’s give it our best shot; this is that important.”

To contact the reporter on this story: Ben Penn in Washington at bpenn@bloomberglaw.com

To contact the editors responsible for this story: John Lauinger at jlauinger@bloomberglaw.com; Jay-Anne B. Casuga at jcasuga@bloomberglaw.com

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