While unlikely to affect the current ABC test governing Independent Contractor status under the California Labor Code, we can expect legal challenges from Gig Economy employers.
On October 13, 2022, the U.S. Department of Labor (“DOL”) published a proposed rule to rescind and revise the regulations outlining the test for whether a worker is classified as an employee or independent contractor under the Fair Labor and Standards Act (“FLSA”). If adopted, this proposed rule would rescind an earlier rule published on January 7, 2021. The DOL recently extended the comment period for this proposed rule to December 13, 2022. After the comment period, the DOL will decide whether to adopt or modify their proposed rule or not move forward with implementing it at all.
The purpose of this Special Bulletin is to describe the major changes in the proposed rule and how they affect California public agencies and nonprofits who primarily follow the “ABC” test established under the California Supreme Court’s Dynamex case and subsequently by the passage of California Assembly Bill 5 (AB 5).
Major Changes in the Proposed Rule
This Proposed Rule, if adopted, would rescind an earlier January 7, 2021 rule (“2021 Independent Contractor Rule”) and replace it with an analysis “more consistent with the FLSA as interpreted by longstanding judicial precedent.” The previous 2021 Independent Contractor Rule emphasized the use of “core factors” instead of a “totality of the circumstances” approach in determining whether a worker is an employee or independent contractor. The previous rule identified five economic realities factors to guide the inquiry on whether a worker’s status was an employee or independent contractor. The two “core factors” identified as having the most probative value in the previous analysis were: the nature and degree of control over the work and the worker’s opportunity for profit or loss.
In its new rule, the DOL states the 2021 Independent Contractor Rule does not “fully comport with the FLSA’s text and purpose as interpreted by courts and departs from decades of case law applying the economic reality test.”[1] As established by the Ninth Circuit, the economic reality test focuses on: the degree of the alleged employer’s right to control the manner in which the work is to be performed; the alleged employee’s opportunity for profit or loss depending upon his managerial skill; the alleged employee’s investment in equipment or materials required for their task, or their employment of helpers; whether the service rendered requires a special skill; the degree of permanence of the working relationship; and whether the service rendered is an integral part of the alleged employer’s business.[2]
The new regulations (if adopted) will return to a totality of the circumstances analysis of the economic reality test in which the factors do not have a predetermined weight. The DOL also explained that ultimately, individuals who are economically dependent on the employer for work are employees, and that individuals in business for themselves are independent contractors. The Proposed Rule will amend 29 C.F.R. § 795.105 and 795.110 to outline the following factors important in evaluating whether a worker is an independent contractor:
Current Laws Determining Independent Contractor Status under California Law
The following is an overview of the current legal framework in establishing whether a worker in California is an employee or independent contractor.
The California Legislature passed AB 5 (effective January 1, 2020) codifying into law the “ABC” test used in Dynamex[3] under Labor Code section 2775. Under the “ABC” test, a worker is presumed to be an employee unless an employer can satisfy the following:
A) the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
B) the worker performs work that is outside the usual course of the hiring entity’s business; and
C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
AB 5 establishes if a Court rules that the three-part “ABC” test is not met for a certain worker or if the worker is otherwise exempt for other statutory reasons,[4] then the determination of employee or independent contractor status is instead governed by the test established in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello).
LCW published a detailed Special Bulletin on the California Supreme Court’s adoption of the “ABC” test, the expansion of Dynamex, and the adoption of AB 5. (The link to this article can be found here.)
What this means for California Employers
In light of the above requirements under California law, it is not likely that the DOL’s Proposed Rule will have a significant impact on how California employers determine whether a worker is an independent contractor. These proposed changes show the DOL is shifting toward a totality of circumstances analysis framework when reviewing the economic realities of whether a worker is an independent contractor. If the DOL’s Proposed Rule becomes final, employers will need to assess whether the final rule presents any changes of which California employers need to be aware, and make needed modifications to their engagement of independent contractors accordingly.
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[1] 87 Fed. Reg. 62218, 62225 (Oct. 13, 2022)(amending 29 C.F.R § 795.105)
[2] Real v. Driscoll Strawberry Associates, Inc. 603 F.2d 748, 754 (9th Cir. 1979)
[3] Dynamex Operations West, Inc. v. Superior Court (April 30, 2018) 4 Cal. 5th 903.
[4] AB 5 created Labor Code section 2775, which codified the “ABC” test adopted in Dynamex. Labor Code Section 2775 carves out a number of exemptions for occupations that remain subject to the old, multifactor Borello test. These exemptions include: insurance agents; medical professionals such as physicians, dentists, podiatrists, psychologists, and veterinarians; licensed professionals such as attorneys, architects, engineers, private investigators, and accountants; financial advisers; direct sales salespersons; commercial fisherman; some contracts for professional services for marketing, human resources administrators, travel agents, graphic designers, grant writers, fine artists, freelance writers, photographers and photojournalists, and cosmetologists; licensed real estate agents; “business service providers”; construction contractors; construction trucking services; referral service providers; and motor club third party agents. In addition, AB 2257 exempted the following industries and occupations from AB 5: fine artists; freelance writers; still photographers; photojournalists; freelance editors; newspaper cartoonists; translators; copy editors; producers; insurance inspectors; real estate appraisers; manufactured housing salespersons; youth sports coaches; landscape architects; and professional foresters.