Transition To A Biden Administration: Recent Developments And The Continuing Debate Concerning Worker Classification

• Published date: 07 January 2021
• Subject Matter: Employment and HR, Litigation, Mediation & Arbitration, Employee Benefits & Compensation, Employee Rights/ Labour Relations, Trials & Appeals & Compensation
• Law Firm: Paul Weiss Rifkind Wharton & Garrison
• Author: Jay Cohen , Meredith Dearborn, Karen L. Dunn, Jean M. McLoughlin, Jessica E. Phillips, Liza M. Velazquez, Lawrence I. Witdorchic, Aaria Helen Keane, Kyle Smith and Leah J. Park

Recent developments have drawn renewed attention to the debate concerning the appropriate standard for determining whether a worker should be considered an employee or an independent contractor under federal and state wage and hour laws. On the federal level, the Department of Labor (the "DOL") announced a proposed rule regarding worker classification under the Fair Labor Standards Act (the "FLSA") in September, which represents the latest attempt by the agency to clarify the long-standing "economic reality" test for determining independent contractor status. Given the upcoming administration change, however, it is unclear whether this latest DOL rule will be finalized.¹ Instead, President-elect Joseph Biden stated that he would establish a federal standard modeled on the "ABC" test recently adopted by the California Supreme Court² for all federal labor, employment and tax laws-including the FLSA. Under that test, employee status is presumed unless the employer can satisfy certain conditions.³

On the state level, following judicial and legislative adoption of the "ABC" test in California, voters approved Proposition 22, a ballot measure which allows hiring businesses to continue to classify app-based transportation and delivery drivers as independent contractors while providing certain alternative benefits that are similar to those available to employees.⁴ Other states may promulgate new classification standards, on a statewide and/or industry-specific basis, in the future.⁵

In light of these events and in anticipation of the transition to a Biden administration, we summarize below the recent changes in the DOL FLSA worker classification guidance, as well as developments in California regarding the newly approved ballot measure.

The DOL's Shifting "Economic Reality" Test Applicable to FLSA Claims

The question of whether an individual worker should be classified as an employee or, instead, as an independent contractor under the FLSA can have enormous significance for workers and businesses. The FLSA requires covered employers to pay their nonexempt employees at least the federal minimum wage for every hour worked and overtime pay for every hour worked over 40 in a workweek, and mandates that employers keep certain records regarding their employees.⁶ These requirements do not apply to independent contractors, but the FLSA does not define that term. Instead, the FLSA defines "employer" to include "any person acting directly or indirectly in the interest of an employer in relation to an employee,"⁷ "employee" as "any individual employed by an employer"⁸ and "employ" as "includ[ing] to suffer or permit to work."⁹

The DOL has periodically issued and revised its guidance on how to distinguish independent contractors from employees using different variations of a multifactor "economic reality" test that analyzes various indicators of economic dependence.¹⁰ In the two most recent iterations of its guidance, the DOL has alternately expanded and contracted the "economic reality" test, though in the context of the DOL's rulemaking, that test only applies to the FLSA, not to other federal, state or local laws that may apply different tests for independent contractor classifications.¹¹

In 2015, during the Obama administration, the DOL explained that the definition of "employ" under the FLSA is "expansive," and that the economic reality test should be applied in recognition of the broad "suffer or permit" standard under the law.¹² According to the DOL's 2015 guidance (the "2015 Guidance"), an appropriate application of the economic reality test considers: (i) the extent to which the work performed is an integral part of the employer's business; (ii) the worker's opportunity for profit or loss depending on his or her managerial skill; (iii) the extent of the relative investments of the employer and the worker; (iv) whether the work performed requires special skills and initiative; (v) the permanency of the relationship; and (vi) the degree of control exercised or retained by the employer.¹³ Notably, as the DOL noted at the time, under this standard, "most workers are employees under the FLSA."¹⁴ The 2015 Guidance also cautioned that the "control" factor should not be given undue weight and that the above factors should be considered in totality to determine whether a worker is economically dependent on the employer, and thus an employee.¹⁵

Two years later, the 2015 Guidance was withdrawn by the DOL under the Trump administration,¹⁶ foreshadowing a pendulum swing towards a more narrowly focused "economic reality" test. Subsequently in April 2019, the DOL issued an opinion letter that concluded that workers of a gig economy employer are independent contractors, applying the same "economic reality" test articulated in the 2015 Guidance.¹⁷

In September 2020, the DOL issued a proposed rule adopting a revised "economic reality" test for determining employee status (the "PR") for purposes of the FLSA.¹⁸ Under...