In January, the U.S. Department of Labor (DOL) announced a final rule attempting to clarify the standard for classifying a worker as an independent contractor rather than employee under the Fair Labor Standards Act. That rule was promulgated under the previous presidential administration and was scheduled to go into effect in March. The rule focused on an “economic reality” test to determine whether the worker is economically dependent upon the employer for work or is actually in business for him/herself. The effect of the rule was to make it easier to classify a worker as an independent contractor rather than an employee.
Under the new presidential administration, the DOL announced on May 5 that it was withdrawing that rule, saying it “would have a confusing and disruptive effect on workers and businesses alike due to its departure from longstanding judicial precedent.” No new rule was immediately announced, but President Biden has said he supports an "ABC" test similar to California's independent-contractor rule. California requires all three of the following factors to be met for a worker to be properly classified as an independent contractor, with some exceptions:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work;
- The worker performs tasks that are outside the usual course of the hiring entity's business; and
- 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.
As we said in a previous post, Virginia employers should be very cautious about classifying a worker as an independent contractor. A new law enacted by the 2020 Virginia General Assembly provides a stringent test for an employer to justify that classification. The statute states that “an individual who performs services for a person for remuneration shall be presumed to be an employee of the person.” It also provides that IRS guidelines should be used to determine independent contractor status. Those guidelines are not identical to the DOL guidelines. The penalties for misclassification under the Virginia law are potentially severe.
John Falcone and Luke Malloy handle employment law matters at PLDR Law. Feel free to contact us if you have questions about this matter.