What the Texas Federal Court Giveth, the Department of Labor Taketh Away

By Rob Cruz, People2.0’s Associate General Counsel—IC Compliance

In the already gray world of independent contractor (IC) classification, add some opaqueness. This is thanks to the Department of Labor’s (DOL) announcement this week to create another new rule for IC classification. Specifically, the DOL intends to create a new, final rule/test to determine IC compliance under the Fair Labor Standards Act (FLSA). The FLSA governs areas like minimum wage and overtime.

What new rule lurks outside the gates, waiting to enter? For that, we only need to understand where we’ve been to see where we’re heading.

During the Obama administration, the DOL used a six-factor “Economic Realities” test, which it interpreted stringently. The agency emphasized that most workers should be employees.

Towards the end of the Trump administration, the DOL created a new rule: a two-factor
analysis, with several subfactors should the first two be inconclusive. Under that rule, IC analysis would be based on the IC’s entrepreneurial ability, such as opportunity for profit and loss and the amount of control the IC has over the work.

Before the Trump-era rule took effect (March 2021), the new Biden administration withdrew it, stating it ran counter to the purposes of the FLSA.

Then, a federal court in Texas overruled the DOL’s withdrawal (March 2022), citing that the DOL acted unlawfully, thus asserting that the Trump rule still, well, ruled. The DOL has since appealed that decision, and now has announced the intent to create the new rule.

“Rest assured, if you’re trying to get IC classification right, and are taking steps to ensure you are, you’re ahead of many others.”


Still with me?

The new rule that the DOL will propose may look like the old Obama rule: a return to an Economic Realities test, focused on multiple factors analyzing the client-worker dynamic (“who controls the work, who provides the tools, etc.”). In my opinion, they should create a test that can align the courts with the DOL, so that deciding proper classification becomes more predictable. Even if that was the case, however, don’t forget that other federal agencies—IRS, NLRB, as well as the states—can all parse this differently. So, even if the DOL could harmonize the federal court system on this matter, other agencies and individual states could (and do) take a different approach.

Companies looking to understand and comply with all of this should feel overwhelmed. Rest assured, if you’re trying to get IC classification right, and are taking steps to ensure you are, you’re ahead of many others. Even prior to the pandemic the world of work was changing, and now, more than ever, workers around the globe are discovering the benefits of contract work and like the freedom it offers. Organizations should embrace the skills and expertise from this pool of independent talent. However, using the valuable services that ICs provide should not be a dicey gambit, but it is, and expertise is needed. Then again, if you don’t like the DOL’s next rule, just wait a few years for a new administration to come about. They may change it all over again.

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