Independent Contractor Rule Frozen, Employers Will Likely See Push Toward California’s ABC Test

On January 20, 2021, the White House issued a memorandum entitled, “Regulatory Freeze Pending Review” instructing the heads of executive departments and agencies to stop all non-emergency regulatory activity until a review by the new administration could be conducted.

Specifically, the memo instructed the agencies to immediately:

  • Halt proposing or implementing any rules until the new administration’s appointee for each specific agency reviews and approves the rule.
  • Withdraw any rules currently pending publication by the Office of the Federal Register (OFR).
  • Consider a 60-day postponement for the enactment of any rules already published by the OFR or those that have not yet taken effect “for the purpose of reviewing any questions of fact, law, and policy the rules may raise.”

One of the pending rules effectively rolled back by this memo is the Department of Labor’s Final Rule issued on January 7, 2021, that established new standards for employers in determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). This final rule, which was to take effect on March 8, 2021, reduced the number of factors the agency would use to determine whether a worker should be classified as an employee or independent contractor. 

The DOL identified two “core factors” in the final rule for determining employment status: (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 initiative and/or investment. These core factors are given greater weight in determining if a worker is economically dependent on someone else’s business or, as a matter of economic reality, is in business for themselves.

The absence of federal guidelines on classification standards for independent contractors has given rise to differing tests and rules across states and in federal courts, further confusing the issue for employers that can face substantial penalties for misclassifying employees as independent contractors.

As part of his presidential platform, President Biden has pledged to work with Congress on establishing a federal standard for independent contractor classification based on the ABC test used by California and several other states to determine worker status:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed for the company.

An employer would need to establish all three of the above factors in order for a worker to be classified as an independent contractor.

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 678-439-6236.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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