Hunton Employment & Labor Perspectives

The legal landscape for defining “employers,” “employees,” and “independent contractors” can be quite dynamic, as this past year has illustrated. In January 2021, the Department of Labor issued an employer-friendly independent contractor rule that would have departed from the agency’s typical balancing test, but it formally withdrew this rule in early May with the change in administration. The DOL’s independent contractor rule is intended to provide guidance to employers when determining whether a worker is an employee or an independent contractor. For employers, this is an important distinction because the FLSA’s overtime and minimum wage protections apply only to employees, not independent contractors. Because courts and employers sometimes struggle to find this line using the economic realities test and its iterations, the Trump-era independent contractor rule aimed to provide a clearer definition of “employee,” as opposed to “contractor.” The DOL has not yet proposed a new independent contractor test, but employers should be mindful that the Biden administration may potentially announce a new rule on this topic.

In the meantime, prudent employers should also keep an eye out for developments in this area on the state level. For example, California’s ABC Test is harder for employers to satisfy than some of its federal corollaries. Under this test, a worker is presumed to be an employee unless the alleged employer can demonstrate that the worker: (1) is free from the alleged employer’s control and direction regarding the performance of his/her work, (2) performs work outside of that employer’s typical course of business, and (3) is customarily engaged in an independently-established trade or business doing the same type of work as the work he/she performs for the employer at issue. California employers have been operating under the confines of this test since it was first articulated by the California Supreme Court in 2018, and as of January 2021 the test will also apply retroactively.

Another recent change in the independent contractor versus employee legal scheme is the U.S. House of Representatives’ passing the Protecting the Right to Organize (PRO) Act on March 9, 2021. If this Act becomes law, it will dramatically redefine the National Labor Relations Board’s definitions of “employer” and “employee” such that “employees” would include many workers now defined as supervisors or independent contractors. The PRO Act implements the ABC Test, discussed above, making it much more difficult for employers to classify their workers as independent contractors. In addition to the Act’s significantly shrinking the class of workers who fit within its independent contractor requirements, it also extends joint employer liability by imposing liability for the exercise of indirect control over workers.

As this is a remarkably fluid area of law, changes in the legal distinctions between “employees” and “independent contractors” are likely to continue. Employers deciding how to interact with and classify their workers should reach out to counsel for assistance in navigating this shifting legal landscape.