The US Department of Labor independent contractor final rule dodged, at least temporarily, lawsuits that sought to block it before its effective date on Monday, leading to several compliance questions for employers, attorneys told HR Dive.
The DOL rule introduces a “totality of the circumstances” framework for analyzing independent contractor relationships under the Fair Labor Standards Act. In doing so, the agency said it will consider six non-exhaustive factors, including the nature and degree of control over the work performed, the extent to which the work is an integral part of the employer’s business and the permanence of the agreement.
Years of legal battles preceded publication of the final rule. The Biden administration initially tried in 2021 to rescind an earlier independent contractor final rule issued by the Trump administration, but a federal district court judge ruled against DOL and reinstate the Trump-era rule.
On appeal, the US 5th Circuit Court of Appeals issued a stay of the judge’s decision. Then last month, the 5th Circuit overturned the lower court’s ruling and lifted the stay after the latest final rule was issued, driving future litigation.
Separately, the independent contractors sued DOL Georgia i Louisiana seeking a preliminary injunction on the new final rule, with the latter case filed just before the weekend before the rule’s March 11 effective date.
However, none of those efforts appeared to have prevented the rule from taking effect on Monday.
Application: “Gives them something new to point to”
However, employers have had several weeks to prepare for the independent contractor rule. Lucas Asper, a shareholder at Ogletree Deakins, told HR Dive that among his clients, those most interested in discussing the final rule have been preparing for some time.
“The most dependent [independent contractors]or at least [those whose] The business model already uses this work structure, these people have been focused on this since the time the proposal came out,” Asper said. “We all know this was going to come eventually.”
The DOL’s six-factor test may be a change for employers, but Asper said the reality is that the test is very similar to what employers have dealt with in years past, including the Trump-era final rule. This rule he emphasized two “basic” factors. in its analysis of independent contractor relationships, while the new rule “says we’re going to look at everything,” he continued.
For employers, the rule’s biggest effect may be that it signals the focus of wage and hour investigators on misclassifying workers, Asper said; “It gives them something new to point to.”
Time will tell about court challenges
While lawsuits challenging the DOL final rule didn’t hold up in court, that doesn’t preclude an injunction from being issued at some point in the future, Morgan Lewis partner Christopher Parlo told HR Dive. In the meantime, there are a few things employers can do to ensure their independent contractor arrangements stand up to potential scrutiny.
For example, Parlo said, employers can develop question-and-answer documents to proactively address inquiries from independent contractors working for their organizations, which may be a necessity given the increased advertising that gave the final rule this week. “The management of the company should be aware of what those questions would be,” Parlo said.
Additionally, employers should review the independent contractor’s documentation to ensure that associated provisions do not suggest employee status, he continued. For example, employers should avoid terms that imply that the services performed by a contractor constitute an “exclusive” relationship.
Employers should also make sure they’re not paying independent contractors’ expenses, Parlo said, and could consider adding arbitration agreements with class action waivers to their independent contractor agreements. The latter could allow entrepreneurs to face potential challenges individually rather than through collective action, he noted.
The DOL final rule includes control over the performance of work as a factor in the independent contractor analysis, so employers may want to consider adding language to contracts to make it clear that they not only do not exercise such control, but who have also affirmatively renounced it. full capacity “That’s what’s supposed to happen, but writing it into a contract is important,” Parlo said.
ERISA Plan and Employee Benefit Implications
Although the final rule is an FLSA regulation, its effects can be felt in other aspects of employment law. One such area is employee benefit plans governed by the Employee Retirement Income Security Act, said Sarah Sise, a partner at Quarles & Brady.
That’s because previous federal court decisions have held that eligibility to participate in an ERISA plan is based on how employers classify potential participants, rather than a common law standard, Sise said.
If an employer reclassifies independent contractors as employees to comply with the final rule, he continued, that could also make those workers eligible for ERISA plan coverage. If the employer fails to do so, it could face penalties.
“It’s just understanding the classifications so that a year from now we don’t have corrections to make because we excluded someone improperly [from an ERISA plan]”, said Sise. “This is going to be a big problem.”
Parlo agreed that ERISA-related coverage is a potential concern for employers, and said employers may want to consider strengthening language in their agreements stating that independent contractors are not entitled to such coverage or other benefits such as holidays, permits, bonuses or attendance at company events.
“If you use language that says you are not eligible to participate in our [ERISA] plans even if a court or agency later determines that you should have been an employee, that’s enforceable,” Parlo said. “A court or agency can’t force you to retroactively put them into your plans. It’s not a one-size-fits-all solution, but it’s important.”
