As the independent workforce continues to grow, so do the issues of worker compliance and misclassification. It is important for enterprises to remain informed about the latest laws, regulations, and developments surrounding these topics. 2022 was a fascinating year for independent contractor compliance. Here’s a look at some top stories.
1. U.S. Department of Labor Proposes New Rule for Classifying Workers as Employees or Independent Contractors
In October, the United States Department of Labor (DOL) proposed a rule to revise the DOL’s analysis for determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA or Act). The proposed rule says that the proposed changes would make the DOL’s approach more consistent with judicial precedent.
The proposed rule changes the way certain factors are considered in the economic reality test—the test to determine if a worker is an employee or independent contractor under the FLSA. The proposed rule removes the emphasis on two core factors in the current rule. Both the proposed rule and the current rule adopt the economic realities test that was introduced in a number of Supreme Court cases in the 1940s. Circuit courts have adopted slightly different versions of the economic realities test—with slightly different emphases. Both the current rule and the proposed rule were adopted to try to standardize the economic realities tests.
The Biden administration is known for supporting organized labor and many commentators view this rule as a benefit to organized labor. As a candidate, Joe Biden promised to establish a standard for all employment laws modeled on the stricter ABC test that is in place in California and Massachusetts. To the extent the proposed rule does not adopt the ABC test, the rule is a victory for those who want to operate an independent business and the clients that engage them.
Both the proposed rule and the current rule relying on weighing of a number of factors to determine if the workers “as a matter of economic reality, are dependent upon the business to which they render service.’’ Bartels v. Birmingham, 332 U.S. 126, 130 (1947). Both the current and proposed regulations refer to the factors as “guides”. The current regulation says “[t]he economic reality factors … of this section guide the determination of whether the relationship between an individual and a potential employer is one of economic dependence and therefore whether an individual is properly classified as an employee or independent contractor. These factors are not exhaustive, and no single factor is dispositive.” (emphasis added).
The proposed rule says “These factors are tools or guides to conduct a totality-of-the-circumstances analysis. This means that the outcome of the analysis does not depend on isolated factors but rather upon the circumstances of the whole activity to answer the question of whether the worker is economically dependent on the employer for work or is in business for themself.” (emphasis added).
While the current rule has two core factors and three additional factors and the proposed rule has six factors plus additional factors, both rules contemplate a weighing of the factors and using the factors as a guide to the final determination. Courts will continue to weigh the facts in any particular case to determine if a worker is an employee or independent contractor. By relying on the totality of the circumstances analysis, the classification may be more complex and require additional expertise to properly classify workers.
MBO does not expect that any independent contractor working for MBO will need to be reclassified if this rule takes effect nor than any material change will necessary to its process.
2. Federal Trade Commission Announces It Will Protect Gig Workers
The Federal Trade Commission (FTC) announced enforcement priorities to protect gig workers. The FTC enforces the Federal Trade Commission Act (FTC Act) and other laws and regulations that prohibit unfair methods of competition and unfair or deceptive acts or practices. The FTC also enforces federal antitrust laws that prohibit anticompetitive mergers and other business practices that could lead to higher prices, fewer choices, or less innovation.
In September, the FTC issued a policy statement outlining the ways in which the FTC would protect gig workers. The FTC said that no matter how gig workers are classified, they are consumers who are entitled to protections under the law. The FTC’s policy statement said it would use the laws that it enforces to prevent unfair, deceptive, and anticompetitive practices in the gig economy including:
- Misleading claims about the costs and benefits of gig work
- Deceptive or unfair pay practices
- Undisclosed costs or terms of work
- Unfair or deceptive practices involving artificial intelligence or algorithmic based decision-making prohibited by the FTC Act
- Unfair contractual terms or restrictions on mobility
- Unfair competition including wage fixing and price coordination
The FTC will use the full portfolio of laws it enforces to prevent “unfair, deceptive, anticompetitive and otherwise unlawful practices” affecting gig workers.
This policy statement follows the announcement in July of a cooperation agreement with the National Labor Relations Board (NLRB). The FTC and NLRB agreed to cooperate to protect workers against unfair methods of competition, unfair or deceptive acts or practices, and unfair labor practices. They agreed to share information and training, and coordinate education and outreach.
3. FTC and NLRB Announce Interagency Cooperation in the “Gig Economy”
In July, The Federal Trade Commission (FTC) and the National Labor Relations Board (NLRB) signed a Memorandum of Understanding (MOU) that focused on the gig economy. Areas of interest included information sharing, cross-agency training, claims and disclosures about earnings and cost, and the classification and treatment of workers.
“Miguel Lopez and Andrew Spurchise remarked that this MOU is, “the latest effort in the federal government’s expansion of antitrust enforcement into the labor market, from its traditional concern with consumer pricing.” Moving forward, gig economy companies should expect that any information they submit or investigation they undergo will be overseen by both the FTC and NLRB. Lopez and Spurchise write, “companies are advised to consult with experienced counsel in determining options to protect legitimate business needs while preserving the independent nature of individual service providers with respect to each one of these areas of interests.”
4. United States Supreme Court says Arbitration Agreements can Compel Arbitration of California’s PAGA Claims
Until June of 2022, California businesses that use arbitration agreements were not able to require that employees arbitrate claims brought under California’s Private Attorneys General Act (PAGA). Under PAGA, an employee can bring a claim against their employer for violations of California labor laws as a representative of themselves and other current and former employees.
California businesses that use arbitration agreements have been able to require arbitration of all claims except PAGA claims. For businesses that use independent contractors, arbitration agreements have allowed the business to avoid class action lawsuits alleging misclassification of workers as independent contractors but the arbitration agreements did not apply to PAGA claims. For example, businesses using independent contractors were subject to PAGA claims that the business did not issue a pay stub in accordance with California labor laws.
This month, the United States Supreme Court said that an employee must arbitrate an individual PAGA claim if the employee signed an appropriate arbitration agreement. Once the individual employee’s PAGA was going to be resolved by arbitration, the Court said that the individual did not have standing to continue the PAGA claims on behalf of other current and former employees.
This is a huge development for employers in California and businesses in California. Employers and businesses are now able to enter arbitration agreements with employees and independent contractors and avoid class action lawsuits.
Please note that in 2010, California enacted a statute that prohibits employers from requiring workers to agree to mandatory arbitration (AB51). AB51 was immediately challenged but was upheld by the Ninth Circuit Court of Appeals. Many commentators think that if appealed to the United States Supreme Court, the Court will say that the Federal Arbitration Act (FAA) preempts AB51. Until appealed or repealed, California employers may not require employees to sign an arbitration agreement.
5. Class Action Lawsuits Alleging Misclassification of Independent Contractors Become More Difficult in Ninth Circuit
In July, the Ninth Circuit Court of Appeals made it harder to bring class action lawsuits alleging the misclassification of independent contractors. To bring a class action lawsuit, the plaintiffs generally must show that “questions of law or fact common to class members predominate over any questions affecting only individual members.” In this case, the court said that there were not common facts that established liability.
In Bowerman v. Field Asset Services, Inc., No. 18-6303(9th Cir. 2022), the court said that the plaintiffs failed to show by common evidence that there was any liability or the amount of damages resulting from the liability. The court said that liability would require highly individualized inquiries on whether any worker ever worked overtime or ever incurred reimbursable business expenses. The court said that if the plaintiffs cannot prove that damages resulted from the company’s actions, then a class action was not appropriate.
This is a boost for businesses that engage with independent contractors. The court’s decision makes it harder for independent contractors to bring class action lawsuits alleging misclassification because many determinations of whether there was any liability would require an individual inquiry which will make the cases not appropriate for a class action lawsuit.
For more information, check out our resources page on misclassification and compliance, or contractor engagement best practices. If you have any questions about engagement, classification, or management of your independent workforce, we’re always here to help.