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Independent Contractor Rule Would Give Employers Potent Weapon

Sept. 23, 2020, 12:21 PM

A new proposal clarifying independent contractor status must first survive numerous legal, political, and calendar hurdles, but if successful the Trump administration would be handing businesses a pivotal advantage in quashing worker lawsuits.

The U.S. Labor Department unveiled the highly anticipated proposed rule Tuesday, adopting a shorter, simpler test for when employers may legally classify workers as independent contractors rather than employees who are covered by federal minimum wage and overtime law.

Attorneys predict the rule, while subject to reversal if Joe Biden wins the presidency and not necessarily owed deference by judges, would deliver companies a persuasive tool to fend off expensive class actions accusing them of misclassifying workers as independent contractors.

“Frankly, I think this area is very confusing for courts. There are so many factors and so much case law and the case law has come out so divergently,” said Shannon Liss-Riordan, who’s built a prominent nationwide practice representing workers for gig economy employers such as Uber Technologies Inc. and Lyft Inc. in high-profile classification battles.

“I do worry that there are judges out there who will rely on this” DOL rule “because it is a recent statement that purports to put together the law in one neat package,” she said.

Reactions split along predictable lines, with business groups and Republicans praising DOL’s effort to provide long-sought clarity and Democrats and worker advocates blasting it as a corporate giveaway. But both plaintiff and management counsel were aligned in expressing skepticism over whether the rule will actually come to fruition, despite administration aspirations to fast-track the rule to completion by year’s end.

“There are a variety of roadblocks that could impede the proposed rule from becoming final—legal, political, and otherwise related to the fact we’re in an election year,” said Brett Bartlett, who co-leads the national wage-hour practice group at management-side Seyfarth Shaw. “I’m asking our clients to reserve their excitement until we see where the road takes us.”

Control Flipped

If it does take effect, the rule would consider five factors to determine whether a worker is economically dependent on an employer, and therefore an employee—not a contractor. DOL would give greatest weight to two core factors: the nature and degree of the employer’s control over the work and the worker’s opportunity for profit or loss based on personal initiative or investment.

They’re complemented by three additional “guideposts,” which would be useful in the analysis when the initial two core factors are conflicting. Those three criteria are the amount of skill required in the work, the degree of permanence in the work relationship, and whether the work is part of an integrated unit of production.

By focusing the inquiry of worker status on a worker’s control over their work, the department has significantly departed from its previous more expansive interpretation of employee status under the Fair Labor Standards Act, said Juno Turner, litigation director at the nonprofit law firm Towards Justice.

“Control has always been an important part of that test, but it’s the employer’s control over how the employee does that work. And the department is proposing to flip it so that it’s about the control the employee has over their work,” said Turner, who represents workers in FLSA misclassification claims. “That’s a really important distinction because it’s really easy for an employer to claim for example, in the gig economy, ‘They can choose their hours of work, they can choose their days of work.’”

Big Annual Savings

The proposal from DOL’s Wage and Hour Division must now go through a 30-day public comment period, setting up a tight window for the agency to review feedback, craft an updated final rule, get White House approval, release the regulation, and allow lead time for it to take effect before Inauguration Day on Jan. 20.

If Democratic nominee Biden defeats the Republican President Donald Trump, he could rescind any rule that hasn’t taken effect. Or if the Senate and House are Democratic majority, they could utilize the Congressional Review Act to invalidate it.

But that’s a challenge the agency’s political brass is ready to take up. A senior DOL official, speaking on a media call Tuesday, said, “We look forward to finalizing this rule before the end of this year.”

Despite the uncertainty, wage-hour lawyers are weighing the potential impact this rule would have on future liability for overtime and minimum wage lawsuits under the Fair Labor Standards Act.

The proposal’s economic analysis gives employers reason for excitement, forecasting the regulation would lead to nearly $481 million in overall savings per year—the vast majority of that total benefiting employers from reduced litigation costs and more certainty when making classification decisions.

That’s not even including potential transfers in wages from workers to businesses when an unpredictable number of employees are reclassified as independent contractors, a possibility the agency declined to put a price tag on in the proposal.

“What the proposed rule does is simplify the rule but in a way that effectively presumes workers are NOT employees,” said Catherine Fisk, an employment law professor at the University of California at Berkeley, in an email. “That means companies can predictably know that they can treat their workers as contractors and not comply with wage/hour law, and know they also will be able to prevail on an early summary judgment motion if they are sued.”

Management attorneys don’t see the wave of worker misclassification lawsuits, particularly in the gig economy, disappearing any time soon. But they agreed that the added simplicity from DOL could give their clients a decisive advantage in the courtroom.

“I think it’ll be a powerful weapon for employers, and for employers who properly structured their relationships with individuals consistent with the rule,” said Lee Schreter, who co-chairs the wage-hour practice at Littler Mendelson.

More specifically, businesses may have an improved pathway to avoid the expenses of drawn-out, fact-intensive misclassification lawsuits by defeating claims at an earlier stage.

“If you can establish that there’s no dispute of facts,” summary judgment victory for employers will be more likely as a result of DOL’s rule, said Salvador Simao, who chairs the wage-hour practice at management firm FordHarrison. “If employers have good contracts with their contractors, delineating the duties that are being performed, then yeah, it will be much easier to get summary judgment at that point.”

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

To contact the editors responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; Andrew Harris at aharris@bloomberglaw.com

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