The U.S. Department of Labor on Wednesday published a final rule designed to help employers and workers better understand when a worker qualifies as an employee and when they may be considered an independent contractor under the Fair Labor Standards Act. For many business and trucking interests, however, the latest federal analysis is not the sort of government help they were looking for.
The rule, which takes effect March 11, rescinds the Trump administration’s Jan. 7, 2021, Independent Contractor Rule that the department contends is not consistent with “the law and longstanding judicial precedent.”
The Justice Department calls misclassification “a serious problem” that impacts workers’ rights to minimum wage and overtime pay, facilitates “wage theft,” allows some employers to “undercut their law-abiding competition,” and hurts the economy at-large.
“Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” Julie Su, acting secretary of labor, said in a statement. “This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned.”
Not so fast
The American Trucking Associations, in response, pledged to work with Congress to defeat the “ill-advised rule.”
“I can think of nothing more un-American than for the government to extinguish the freedom of individuals to choose work arrangements that suit their needs and fulfill their ambitions,” Chris Spear, ATA president and CEO, said. “More than 350,000 truckers choose to work as independent contractors because of the economic opportunity it creates and the flexibility it provides, enabling them to run their own business and choose their own hours and routes. That freedom of choice has been an enormous source of empowerment for women, minorities, and immigrants pursuing the American Dream.”
The ATA statement goes on to argue that the trucking industry has used independent contractors “since the inception” of interstate trucking, and that court decisions over the last 90 years have “continually reaffirmed the legitimate role” independent contractors play in the U.S. economy.
“It's unfortunate that the [Biden] administration has chosen to replace a clear and straightforward standard with a tangled mess that weakens our supply chain and undermines the livelihoods of hundreds of thousands of truckers across the country,” Spear said. “The coordinated release of this rule with the renomination of Julie Su to lead the Department of Labor is proof positive that the administration is doubling down on destructive policies that eliminate choice and opportunity for our workforce.”
Emphasizing that the rule is misguided, and that “radical California agendas have no place in federal policy,” ATA also pledged to continue to oppose Julie Su's nomination to lead the Labor Department. As Secretary for the California Labor and Workforce Development Agency, Su oversaw the implementation of the state’s controversial AB5, a law that essentially reclassified ICs as employees.
ATA was not alone in opposition to the new rule. The U.S. Chamber of Commerce suggested the rule is “clearly biased” toward declaring most independent contractors as employees and is also “completely unnecessary,” as the Department continues to report success in “cracking down on bad actors” that are misclassifying workers.
Likewise, the National Retail Federation emphasized the importance of independent contractors in filling a number of roles in the retail supply chain, including billing, facility maintenance, data analysis, delivery, and marketing—especially “important and common” relationships in a post-COVID-19 environment.
“This decision will only foster confusion, endless litigation, and reduced innovation,” David French, NRF senior VP of government relations, said. “As bad as this rule is for retailers specifically and employers generally, it is far worse for the millions of workers nationwide who cherish the opportunity to engage in independent work.”
The Owner-Operator Independent Drivers Association, whose members are small-business truckers, had a more nuanced take on the new role.
In comments filed when the rule was proposed in October 2022, OOIDA noted that the organization has “long advocated” for a classification structure that offers truckers the opportunity for “true independence” to operate their own small businesses while protecting them against carriers that seek to take advantage of them through misclassification. However, this is “a difficult task,” given the diverse nature of the industry and the ability for carriers and truckers to enter into “many different types of working arrangements.”
Still, truckers are tired of “the endless parade of classification rules that do not listen to their concerns,” OOIDA President Todd Spencer told LandLine, the association’s official media outlet.
“As we said when the Biden administration first issued this proposal, we have concerns that some details contained in the rule may disregard specifics of the trucking industry and could lead to the reclassification of independent contractors as employees,” Spencer said. “With that said, we support the Department’s stated intent to follow decades-long practices for classification under the Fair Labor Standards Act, as well as its rejection of the ABC Test as signed into law in California with AB5.”
Legal analysis
The Justice Department answers a series of Frequently Asked Questions here, including how the new rule resembles and how it differs from the 2021 IC rule and how it differs for the October 2022 NPRM.
For those looking for additional perspective, a number of firms specializing in labor law issues posted analyses quickly after the rule became public.
Littler Mendelson’s insight pointed to the rule’s six-factor “economic realities” test to determine independent contractor status under the FLSA:
- the worker's opportunity for profit or loss;
- investments by the worker and potential employer;
- the degree of permanence of the relationship;
- the nature and degree of the potential employer's control over the work;
- the extent to which the work is "integral" to the potential employer's business; and
- the worker's skill or initiative.
The most important change to the initial proposal is to factor four, the Littler analysis suggests. The proposed rule stated that when a potential employer exercises control to comply with other laws or regulations, that control still indicates that the worker is an employee. But the final rule “changes course.”
“Businesses can take steps to comply with state, federal, tribal, or local laws without affecting the worker's classification,” Littler explains. “But the final rule also states that if a potential employer goes beyond specific legal requirements for its own convenience, this additional control will affect the analysis. Businesses who partner with independent contractors should therefore make sure that any control they exercise is necessary to comply with specific legal requirements.”
Regarding factor two, the proposed rule suggested that the department would compare the absolute investments by the worker and the potential employer: If the potential employer invested more than the worker, the worker was likely to be an employee. However, the final rule clarifies that the department will not compare the investments on a dollar-for-dollar basis, according to Littler. Nor will it consider the employer’s absolute size. Instead, it will examine the relative investments to determine whether the worker is making "similar types of investments" that "suggest the worker is operating independently.”
Similarly, Allan Bloom, leader of the wage and hour practice group at Proskauer, writes in the Law and the Workplace blog that the new rule “returns the inquiry to its historical roots,” both at the DOL and in many courts, in considering those six overarching factors in a “totality of the circumstances” analysis.
Yet, and as DOL conceded, the courts are “the ultimate arbiters” in these matters.
“We expect legal challenges to the new rule, both in principle (e.g., that the DOL hasn’t adequately explained its departure from its prior policy, shown that its new policy is consistent with the FLSA, or otherwise demonstrated good reasons for the new rule, as required under the Administrative Procedure Act) and in the context of particular fact patterns,” Bloom writes.
Additionally, “state laws are still (and always) in play,” he emphasizes. Businesses that are confident in their IC classifications under the new federal rule must still contend with the state laws that apply a more stringent test for worker classification, including (among others) California, Massachusetts, and New Jersey.
“If a worker is deemed an employee for wage and hour purposes under those state laws—which may have statutes of limitations and remedies that equal or exceed those available under the FLSA—then federal law will not limit the potential exposure,” Bloom concludes.
Look for additional coverage from FleetOwner as the new rule’s impact on the trucking industry develops.
