U.S. DOL Shows its Colors
By The Grawe Group, October 2022
This week the U.S. DOL released its proposed rule defining independent contractors under the Fair Labor Standards Act. It is a proposed rule, not a final rule. The public has 45 days to comment on the rule, then the DOL will make any tweaks and publish a final rule.
This independent contractor definition will only apply to claims overseen by the U.S. DOL. This has no impact on workers compensation claims, unemployment claims, IRS issues, or many state claims. This applies mostly to claims brought by independent contractors or the DOL itself alleging the independent contractor was improperly classified as an independent contractor and not paid minimum wage, not paid overtime, and so on.
Economic Realities, not ABC:
The DOL is not adopting an entirely new definition of what it means to be an IC under federal wage and hour law. The DOL is not adopting the ABC test, or any other kind of new test. Federal wage and hour law has long used the Economic Realities test to determine if a worker is an IC or an employee. The Economic Realities test, historically, is a multi-factor test that determines whether a worker is an independent contractor, or an employee based on whether the worker is making significant business decisions that lead to their profits or losses. This proposed rule sticks with the Economic Realities test but shifts it significantly away from the Trump administration’s version of the test to essentially the Obama version of the test, if not even more anti-independent contractor status.
The DOL published this proposed rule in a 198-page document that reads like a how-to guide for DOL agency officials to rule in favor of employee status. In that way, the DOL showed what has long been suspected, that under the current administration it strongly disfavors independent contractor status. And that is meaningful in how companies can expect to be treated if they face any claims from the DOL. That temperament against independent contractor status will likely be the biggest practical impact of this proposed rule, but it should be noted the DOL did not have the authority to, and did not, adopt a new independent contractor test. They looked through the case law history on the independent contractors and chose the facts, comments, and decisions that favored employee status to bolster their interpretation of the Economic Realities test.
The DOL’s Proposed Version of the Economic Realities Test:
- The independent contractor’s opportunity for profit or loss based on their own managerial skill. The DOL will not consider taking more loads as evidence of managerial skill. The DOL wants to see meaningful decisions the IC makes that impact profitability or losses beyond just accepting more loads.
- Investments made by the IC compared to investments made by the contracting company. The DOL wants to see the IC made substantial investments in their business.
- Permanence of the relationship. The DOL wants to see the relationship begins and ends and does not continue uninterrupted for years on end.
- The IC’s freedom from the contracting company’s right to control and the contracting company’s actual control over the IC. The DOL wants to see the IC can and does serve multiple customers, the IC has decision making authority over costs and rates to charge, and so on. Notably on this factor, (1) the DOL is proposing that control required by law or by customer requirements, can still be considered the contracting company’s control over the IC depending on the circumstances, and (2) the DOL is proposing that if the IC is performing work that is integral to the contracting company’s business, that will be considered evidence of employee status. These two points are arguably the most frustrating comments from the DOL.
- The IC has specialized skill and the IC exercises initiative to build a business around those skills. The DOL does not consider driving to be a specialized skill, but the DOL does consider a driver adding helpers, adding vehicles, adding contracting company clients, finding profitable deliveries, expanding operating areas, etc. to be skilled and exercising initiative. And anyone that knows trucking knows how difficult and critical it is to finance, fuel, and maintain equipment intelligently.
- All other factors in the relationship between the IC and the contracting company that might suggest the worker was in an independent business.
Takeaways from the Proposed Rule:
- It may not seem worth it, but comment. Go to the federal register’s website and submit comments. Explain to the DOL why their version of the Economic Realities test hurts the owner operators you work with that love being owner operators. One comment may not persuade the DOL to change the rule, but a flood of comments with articulate, sound arguments do help challenges to the rule down the road.
- Regardless of the test, the best way to win a misclassification claim is to prevent one from starting. Refresh your agreements regularly, educate your people on how to respect the business freedoms independent contractors have, focus on end results more – safe, legal, professional, on-time pick up and delivery, and less on how it gets done less, use technology to prove the IC made key decisions, and so on.
If it is time for a fresh look at your independent contractor program reach out to us today. From recruiting to contracts to operations, we know independent contractors and protecting their business freedom.
Check out the website or your favorite podcast repository for the latest episodes of the Grawe Pod. Over the past few months we touched on business development best practices as well as implementing mergers and acquisitions effectively.
The Grawe Group, LLC is here to bring peace of mind to you and your business. We are a professional services firm focused on the transportation industry. With a team of experienced executives, we provide general counsel, executive leadership, and special project services for trucking and logistics companies. From legal and risk management matters, to operational, financial, and leadership challenges, the Grawe Group has the practical expertise in trucking and logistics to help you build sustainable success. www.thegrawegroup.com.
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