The U.S. Labor Department final rule that aims to provide clarity to the raging, and often perplexing, debate around worker classification has a murky future, prompting employment attorneys to advise companies against using the business-friendly test it creates.
The Trump administration’s late-term publication of the final rule Wednesday raised new questions about how employers should decide worker-status questions. The rule, backed by business groups such as the U.S. Chamber of Commerce, would give companies a clearer path to classifying workers as independent contractors rather than employees who are entitled to overtime and minimum wage under federal law.
But the Biden administration pledged to freeze the rule from taking effect, and it has a growing list of options to nullify the measure and replace it with a more worker-protective interpretation. With its future uncertain, the rule may have limited, if any, practical value for companies, some attorneys said.
Others argued there was merit in the rule being published even if it doesn’t take effect.
“I would not expect it to survive,” Susan Harthill, a partner at management-side law firm Morgan Lewis, said. “I would tell employers to wait and see what the Biden administration does with this rule, but, certainly, I would not want to rely on it.”
Management attorneys are gearing up for the possibility that the new administration will advance a standard similar to certain state measures that make it harder for businesses to classify workers as contractors.
Harthill, a former DOL deputy solicitor, said the Democratic Party’s apparent sweep of Tuesday’s U.S. Senate runoffs in Georgia raises the possibility of Congress invalidating the regulation through the Congressional Review Act. Democrats would need only a simple majority of votes in both the House and the Senate to kill the rule through a CRA motion, an action that would bar future rulemaking along “substantially” similar lines.
The incoming Biden administration also could re-open the rulemaking by issuing a request for comment, which would allow it to adopt a much different standard. Or it could seize on a potential lawsuit from an outside party, such as a Democratic state attorney general, to defeat it.
With that in mind, the more reliable course for employers is to review the worker classification test that the appellate court in which they operate has embraced, said Alfred Robinson, who represents employers at Ogletree Deakins.
“Until there’s some clairvoyance on the U.S. Department of Labor’s test, which is in this final rule, and assuming it’s held in abeyance or postponed or suspended, then I would look at the court of appeals test wherever someone is located,” said Robinson, a former acting administrator of the DOL Wage and Hour Division.
Boon for Uber
The rule would effectively give employers a tool to defeat or avoid expensive class actions accusing them of shorting workers on pay because they’ve been misclassified as contractors.
That would be a boon for employers in several economic sectors, including the gig economy, where independent contractors are central to the business models of leading companies such as Uber Technologies Inc., Lyft Inc., and Instacart.
DOL officials on a call for reporters Wednesday cited supportive comments they received on the proposed version of the rule from Uber drivers and other independently contracted workers who said they enjoy the flexibility it provides.
Even if the rule doesn’t go into effect, companies could still use it in court battles over independent contractor status, said Camille Olson, a Seyfarth Shaw partner, who represented the Chamber and other business groups during the rulemaking process.
Previous federal guidance on contractor-versus-employee questions is outdated, and doesn’t take into account the evolving workplace, she said.
“The impact will be significant because it modernizes and clarifies a formula that can be followed,” Olson said. “Workers and employers will have clearer guideposts. That is critical.”
The published rule can still be cited by courts that are reviewing this issue, and it can be instructive in related debates in Congress, Olson said, adding: “Having it published matters.”
But employers facing misclassification claims that try citing the rule in court shouldn’t expect a receptive judge, if Biden blocks it from taking effect, said Catherine Ruckelshaus, general counsel of the National Employment Law Project.
Employers “have to say that they relied on final agency action under the statute, and that means it has to be a final effective rule,” Ruckelshaus said. “Nothing would stop them from making that argument, but that’s not a proper defense under the proper application of the statute.”
The Biden campaign’s labor platform included a commitment to restore the Obama administration’s aggressive wage-hour misclassification agenda. This would entail a more rigid test for qualifying workers as contractors than under the Trump administration’s model.
“The big picture is that, particularly in the last few years, misclassification of workers as independent contractors has been the subject of any number of private lawsuits and investigations by government tax agencies,” said Allan Bloom, an attorney with Proskauer Rose, who leads the firm’s wage and hour practice group.
He said the final rule won’t make a difference and predicted that most battles over classification will be fought on the state level, particularly if progressive states pass new worker-friendly tests.
“If I’m a company, I’m not going to spend the time or money or human capital trying to really base a strategy around this,” Bloom said.
Locke Lord attorney Richard Reibstein was skeptical of the rule’s legal impact. He noted the rule provides only an analysis of prior court decisions, and to that extent could be a roadmap for companies defending these type of cases.
Regulations are entitled to some deference in courts, if they meet certain standards, he said, but courts also can find they aren’t consistent with statute or precedent.
“This hasn’t changed the law. Courts may choose to defer to it or not,” Reibstein added. “Basically, this is destined to the legal junk yard. Even if it did take effect, it doesn’t do much more than set forth a preferred analysis for businesses.”