Proposed rule on contractors appears aimed at California

By making it easier for workers to be classified as independent contractors under the federal Fair Labor Standards Act, a proposed rule issued by the U.S. Department of Labor Tuesday could be read as a clear repudiation of California's "ABC" test, an employment attorney said.

The federal agency's proposed rule would simplify the standard for determining whether a worker is an independent contractor or an employee entitled to the protections offered by the act. The Department of Labor said the current multi-factor "economic reality" standard -- which says workers are employees of a hiring party if they rely on that party to make a living and workers are independent contractors if they are self-reliant -- is unclear and has been inconsistently applied for years. According to the proposal, the new rule "explains the contours of the economic reality test and clarifies and sharpens a test that has become less clear and consistent through decades of case-by-case administration in the courts of appeals."

The proposed rule would decrease the number of factors in the economic reality test to five, and give greater weight to two of those: the nature and degree of the workers' control over their work, and the work's opportunity for profit or loss. It would also be the federal agency's first attempt to formally define what an independent contractor is under the act, the proposal said.

Such changes would likely result in more workers being classified as independent contractors, said Jennifer Kramer, a plaintiffs' attorney with her own firm. The federal agency's proposal discussed the "ABC" test that California workers have to use to determine their classification, Kramer noted. The "ABC" test, which only classifies workers as independent contractors if they meet all three of its prongs, is widely considered to have the opposite effect of the Department of Labor's proposed rule, resulting in more workers being classified as employees.

"Even though [the proposed rule] admits that the 'ABC' test would likely lead to more consistent classification outcomes ... it finds it to be too disruptive economically," Kramer said.

"It looks like it's an effort to give businesses a break on classifying employees properly. They aren't paying payroll taxes, they aren't paying into social security as a result, they aren't paying into workers' comp, they're not paying unemployment," Kramer added. "Clearly the current administration is drawing a line in support of companies like Uber and Lyft."

Lindsay L. Ryan, who represents employers as principal at Polsinelli, agreed Tuesday's move by the Department of Labor was likely a response to the debate around classification in California. "To the extent that we've seen, at least in California, that Assembly Bill 5 has created an issue when it comes to the classification of gig economy workers... that has been obviously a source of tension and divide among the different camps of the debate on employee versus independent contractor classification," she said. "It's certainly true that this regulation is in part intended to respond to that particular sector of gig economy workers, and create a more flexible test for those businesses."

Because California has its own wage and hour laws that provide more generous protections to employees, Tuesday's proposed rule would not impact most workers in the state if it were finalized, said Chaya Mandelbaum, who represents employees as a partner at Rudy, Exelrod, Zieff & Lowe LLP.

"One thing that [the proposed rule] referenced as a justification, and does make a fair amount of sense both in California and federally, is that the current test... was built for a different economy, so there's been a constant need to update through regulations or additional clarification a really old statutory language to fit the modern economy," Mandelbaum said, noting the law was enacted in the 1930s. "This is the latest effort to do that, and certainly one could read the emphasis on something like the ability to control profit or loss, for example, as being an effort to address the complexities of the app-based economy."

He added he doesn't believe Tuesday's proposal introduces a big change from the status quo. "California really shifted away" from the Fair Labor Standards Act, Mandelbaum said. "I don't think this shifts very much from the way the FLSA already was."

Ryan also said the proposal's impact may be limited. "There's a number of other states that, like California, have adopted more rigid independent contractor tests," she said. "The trend for states to start implementing more rigid tests -- I don't think it's a trend that's going to stop."

But some stakeholders said they are wary of the way the Department of Labor is handling the rulemaking process. The federal agency is allowing 30 days for review of, and public comment on, the proposed rule, which is half the time it typically provides, they said.

The California Employment Lawyers Association, National Employment Law Project, and other organizations plan to issue a letter to the federal agency on Thursday to ask for an extension of the review and public comment period to 60 days, confirmed Jasmin Tuffaha, communications manager of the lawyers' association.