A Texas federal district court recently reinstated the independent contractor rule that was put into place by President Trump’s Department of Labor. The rule was previously withdrawn by the Biden Administration.
At the end of the Trump Administration in January 2021, the Department of Labor (DOL) issued a rule that sought to clarify the controlling factors for who is, and who is not, an independent contractor for purposes of the Fair Labor Standards Act. The rule consisted of two main factors and three guiding factors to be evaluated. The two main factors were: (1) the level of control the individual has over his own work; and (2) the opportunity for profit or loss due to their own personal investment. If, and only if, the analysis of the two main factors proved inconclusive of determining independent contractor status, were employers to weigh the three guiding factors: (1) the level of skill of the role involved; (2) the permanence of the working relationship; and (3) how the role in question relates to the employer’s overall business operation. The rule also provided that employers could offer independent contractors certain employee benefits without impacting their classification status, but only if the workers satisfied the five-part test’s other provisions. The rule was widely regarded as favoring independent contractor status and was to take effect on March 8, 2021.
Shortly after taking office, but before the March 8 effective date, the Biden administration delayed the effective date of the rule. A couple of months later, the Biden Administration ultimately withdrew the Trump-era rule. Following that decision by the Biden Administration, various business groups filed a lawsuit in federal court in Texas challenging the Biden administration’s actions.
District court’s decision
Ruling against the Biden administration, the district court made two important determinations. First, the court concluded that the delay of the effective date of the Trump-era rule violated the Administrative Procedure Act in three different ways. Second, the court held that the withdrawal of the Trump-era rule was arbitrary and capricious under the Administrative Procedure Act because it restricted comments to the question of whether or not to withdraw the Trump-era rule, rather than allowing the public to propose other alternatives such as modifying the standard set forth in that rule. The court concluded that “[b]y refusing to consider alternatives to the total withdrawal of the Independent Contractor Rule, the DOL failed to ‘consider important aspects of the problem before [it]’—the lack of clarity of the economic realities test and the need for regulatory certainty.”
Based upon these conclusions, the court overturned the Biden administration’s decisions and ruled that the Trump-era rule “became effective as of March 8, 2021, the rule’s original effective date, and remains in effect.”
As noted above, this decision has reinstated the Trump-era independent contractor rule. Therefore, at this time, employers should use this rule to determine independent contractor status. For now, this ruling will provide some direction as to how the Department of Labor should analyze the question of whether a worker is an independent contractor or an “employee” under the Fair Labor Standards Act (and thus entitled to, among other things, minimum wage). How long this rule will remain in place, however, is to be seen. The Biden administration has not indicated whether it intends to appeal the decision. But whether there is an appeal or not, this decision does not permanently codify the Trump-era rule. It is highly like that the Biden administration will now restart its efforts to have this rule withdrawn and be replaced with a new, more restrictive rule which is less favorable to establishing independent contractor status. Employers should continue to monitor developments in this area as we have not seen the end of this legal drama.
R. Eddie Wayland is a partner with the law firm of King & Ballow. You may reach Mr. Wayland at (615) 726-5430 or at [email protected] The foregoing materials, discussion and comments have been abridged from laws, court decisions, and administrative rulings and should not be construed as legal advice on specific situations or subjects.