The U.S. Department of Labor may be changing the definition of independent contractor vs. employee.
What the federal government considers an independent contractor vs. an employee is once again changing based on the change in administration.
The U.S. Department of Labor is reviewing a 2024 Biden-administration rule that made it harder for companies to define workers as independent contractors. The department has signaled that it may issue a notice of proposed rulemaking to repeal the rule.
In the meantime, a May 1 guidance from the DOL’s Wage and Hour Division is telling investigators not to apply the 2024 rule’s analysis in current enforcement matters under the Fair Labor Standards Act.
“This guidance does not change existing regulations but reflects how the department is allocating enforcement resources during the review of the 2024 rule,” the DOL said.
The ‘Employee Misclassification’ Controversy
Wage and hour rules don’t apply to independent contractors, only to employees. In some cases, employers try to “misclassify” workers as independent contractors to avoid FLSA responsibilities.
Because the Fair Labor Standards Act didn’t clearly define “employee,” it’s been left up to regulatory agencies and the courts to clarify.
In just the past five years, federal regulations regarding worker classification have shifted repeatedly.
In 2021, the Trump administration put in a simplified rule backed by the American Trucking Associations, which focused on two “core factors:”
- Nature and degree of control over work.
- Opportunity for profit or loss based on initiative and/or investment.
The Biden administration replaced that with a rule that narrowed the definition of independent contractor. The 2024 final rule focused on a number of “economic reality factors:”
- Opportunity for profit or loss depending on managerial skill.
- Investments by the worker and the potential employer.
- The degree of permanence of the work relationship.
- The nature and degree of control.
- The extent to which the work performed is an integral part of the potential employer’s business.
- Skill and initiative.
At the time, the attorneys at Becker LLC commented that, “Unlike the 2021 Independent Contractor Rule, which expressly provided for two key factors, [under the Biden rule] employers will now be forced to guess which of the … factors may bear greater weight, thus creating much uncertainty for companies.”
The Trump Administration’s Approach to Independent Contractors
“After the election, commentators anticipated that the Trump DOL would quickly rescind the 2024 ‘Biden Rule,’” wrote labor experts at the law firm Phelps Dunbar recently, commenting on a Supreme Court decision not to take up a case that could have shed light on when employees count as independent contractors.
“But so far, that has not happened,” they continued.
“While it is still widely expected to be eliminated, it is less clear what, if anything, will replace it. The DOL may reinstate the 2021 rule, or it may not replace the rule with anything.
“This would be in line with the U.S. Supreme Court’s recent Loper Bright decision, which held that courts need not defer to an administrative agency’s interpretation of a law. In that case, courts would rely on their existing precedent.”
Adding to the uncertainty of what the DOL may do in regard to the independent contractor definition, new U.S. Secretary of Labor Lori Chavez-DeRemer has long been seen as a supporter of organized labor, which strongly supports stricter independent contractor rules such as the Biden-era rule.
American Trucking Associations
The American Trucking Associations praised the DOL’s action.
“This is a crucial first step toward returning to the common-sense standard set forth in President Trump’s first term, which protected the freedom of individuals to choose work arrangements that best suit their needs and fulfill their ambitions,” said ATA President & CEO Chris Spear.
“The trucking industry has relied on independent contractors since the inception of interstate trucking, and court decisions over the last nine decades have continually reaffirmed the legitimate role independent contractors play in the economy.”
Will Congress Step in to Define Who is an Employee?
SHRM, the Society of Human Resources Management, raised concerns over the regulatory whiplash regarding independent contractors during recent testimony before the House Subcommittee on Workforce Protections.
SHRM called for a legislative solution that clearly defines the factors used in worker classification decisions under the FLSA.
To that end, the recently reintroduced Modern Worker Empowerment Act, H.R.1319, would amend the FLSA and the National Labor Relations Act (NLRA).
“Aligning the FLSA and NLRA on this key threshold issue would help reduce confusion for organizations that must comply with both laws,” said SHRM in its committee testimony.
“California’s disastrous AB 5 law wreaked havoc on independent workers, stripping them of their ability to work on their own terms and forcing businesses to cut off contractor relationships,” said Rep. Kevin Kiley from California’s 3rd District in introducing the bill.
(California’s AB5 law enacted a strict “ABC test” under which most trucking owner-operators cannot qualify as independent contractors.)
“Shifting federal regulations threaten to impose similar uncertainty nationwide, putting millions of workers at risk.”
By codifying the definition into law, he said, “we prevent future administrations from undermining independent workers and provide businesses with the confidence to fully engage with a modern, flexible workforce.”
The American Trucking Associations praised the bill.
“When the previous administration replaced a straightforward definition for independent contractors with an opaque and deliberately confusing standard, it jeopardized the livelihoods of independent truckers nationwide who have spent years or even decades building their own small businesses,” said American Trucking Associations Chief Advocacy and Public Affairs Officer Ed Gilroy.
“Congressman Kiley has been an outstanding champion of the more than 350,000 truckers who chose this employment path because of the economic opportunity it creates and the flexibility it provides.”
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