By: Bryan J. Nelson, Esq., Kristen MJ Johnson, Esq. and Alyssa Milby, Esq.

It’s not the ABC test, but it’s complicated

On October 13, 2022, the U.S. Department of Labor (“DOL”) is publishing a Notice of Proposed Rulemaking on independent contractors. There will be an opportunity for the public to comment on this 184-page notice before the rule goes into effect. Comments may be submitted from now until November 28, 2022. Our firm can assist if you would like your voice to be heard in preparing comments to this notice.

For as long as most of us can remember, the transportation industry has successfully employed individuals and contracted with independent contractors to ensure motor carriers, freight forwarders, warehouse operators, home delivery companies, courier business, lumper services, and all other related entities had the capacity to meet the ever-increasing demand for timely, dependable, and safe logistics services. In recent years, states, including California and New Jersey, have passed laws that threaten the ability for transportation businesses to establish independent contractor relationships with other businesses and individuals, the power for independent contractors, including drivers, to own their own business and maintain financial control of their operations, and the potential for individuals, including drivers, to exercise flexibility in their schedules in pursuit of financial gain. Despite such significant negative impacts to transportation operations within the state of California in the wake of AB-5, imposing a strict “ABC Test,” the federal government appears poised to adopt stricter rules on a national level. While the federal government’s rules are different and considered less strict than California’s ABC Test, the proposed rule reinstates guidance similar to that used under the Obama administration, which is considered less favorable to independent contractor classification.

The 184-page proposal set forth would modify the DOL regulations to revise its analysis for determining employee versus independent contractor classification under the Fair Labor Standards Act (“FLSA”) “to be more consistent with judicial precedent and the act’s text and purpose.” The former Trump-era test included five factors, but two were given far greater weight: (1) the nature and degree of the worker’s control over the work and (2) the worker’s opportunity for profit or loss based on personal initiative or investment. The new Biden administration proposal would consider those two factors and (at least) four others: (3) investments by the worker and the hiring entity, (4) the degree of permanence of the working relationship, (5) the extent to which the work performed is an integral part of the hiring entity’s business, and (6) the degree of skill and initiative exhibited by the worker.

Specifically, the DOL proposes:

• Not using “core factors” and instead returning to a totality-of-the-circumstances analysis of the economic reality test focusing on whether each factor shows the worker is economically dependent upon the hiring entity for work versus being in business for themselves; does not use predetermined weighting of factors, and that considers the factors comprehensively instead of as discrete and unrelated.
• Returning the consideration of investment to a stand-alone factor, focusing on whether the worker’s investment is capital or entrepreneurial in nature, and considering the worker’s investments on a relative basis with the hiring entity’s investment.
• Providing additional analysis of the control factor, including detailed discussions of how scheduling, supervision, price setting, and the ability to work for others should be considered when analyzing the degree of control over a worker, and not limiting control to control that is actually exerted.
• Returning to the long-standing departmental interpretation of the integral factor, which considers whether the work is integral [critical, necessary, or central] to the hiring entity’s business rather than whether it is exclusively part of an “integrated unit of production.”

          See pages 50-51 of the proposed rule.

The DOL states in the proposed rule that it considered codifying an ABC test to determine independent contractor status under the FLSA similar to the ABC test adopted under California’s new state wage and hour law – AB5 – which makes it incredibly difficult for California trucking companies to hire independent contractors without fear of misclassification claims.

“However, the department believes it is legally constrained from adopting an ABC test because the Supreme Court has held that the economic reality test is the applicable standard for determining workers’ classification under the FLSA as an employee or independent contractor,” the proposed rule states. “Because the ABC test is inconsistent with Supreme Court precedent interpreting the FLSA, the department believes that it could only implement an ABC test if the Supreme Court revisits its precedent or if Congress passes legislation that alters the applicable analysis under the FLSA.”

Nevertheless, the policy change would place a heavier burden on transportation companies up and down the supply chain to show that their drivers or other contracted workers are in fact independent contractors based on a broader, totality of the circumstances test. For a national public that has recently witnessed firsthand the impact of inflation on everyday goods, increased operational costs incurred by transportation companies due to the effects of such rule change, including increased tax liabilities, insurance obligations, and other labor, safety, and operational requirements, are likely to be passed down to consumers in the form of even greater increases to the cost of goods. As we have seen throughout the years, it is possible that a change of this scope and magnitude, significantly limiting a transportation company’s use independent contractors, will cause a number of companies to reduce the number of workers they contract, be unable to adequately scale their operations to meet surges or dips in demand, or not be created at all, eliminating critical transportation job opportunities altogether.

A copy of the proposed rule can be found in the Federal Register here.

The public will have 45 days to comment on the rule after it is published in the Federal Register on Thursday, October 13, 2022. Comments may be submitted through the Federal eRulemaking Portal at www.regulations.gov or by mail to Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue, N.W., Washington, D.C. 20210. The DOL strongly recommends electronic submission of comments.

A final rule likely will not take effect until well into next year, but businesses hiring independent contractors in the transportation sphere would be wise to track its progression.