Notice of Proposed Rule for Independent Contractors

October 13th, 2022

The Department of Labor is proposing updated rules for independent contractors. These rules will be most similar to how they were set up under the Obama administration. Here’s what our attorneys at Maynard Cooper had to say about it.

“DOL’s approach to determining independent contractor status has been a bit of a swinging pendulum, depending on the party in charge of the Executive Branch.  The Trump Administration attempted to simplify the rules, by imposing a “Control and Direction Test,” focusing primarily upon the extent to which an employer controls the work of the independent contractor.  The Trump-era rules have been the subject of litigation and DOL efforts to set them aside in the Biden Administration.  With this Notice of Proposed Rulemaking, the Biden Administration has taken the formal steps necessary to return to the Obama-era “Economic Realities Test,” which looks subjectively at the independent contractor’s economic situation to determine whether the individual is truly independent, obtaining work from multiple sources, or instead reliant upon the work from one primary company.

Multiple state and federal agencies enforcing employer wage, hour, tax, and unemployment obligations have historically followed some kind of multifactor test when determining whether a valid independent contractor relationship exists.  Although the majority of states seem to follow something like the Economic Realities Test, a handful of states emphasize the “Control and Direction Test,” while yet a third group of states follow the “ABC Test,” which first became popular in California, and examines whether (A) the independent contractor is free from any direction or control by the company; (B) the work performed by the independent contractor is outside the course of the company’s business; and (C) the independent contractor is in an industry or trade customarily engaged on an independent basis.  There was widespread speculation among trade groups that the Biden Administration’s DOL might pivot to the ABC Test, which is generally considered to be the harder of the three prevailing tests for a company to satisfy when using individuals as independent contractors.

Because the direction and control of the work is a major consideration in all three prevailing independent contractor tests, as a practical matter, this announcement by the DOL brings the federal government’s rules applicable to independent contractors more in-line with the states and the courts, and should not have a significant effect on any employer strategies or on-going engagement of independent contractors.  

We still routinely encourage our clients to conduct an annual review of their use of individuals who are independent contractors, a relationship that continues to be a focus of state and federal regulators, in addition to the plaintiffs’ bar.”