California Joins 17 States in Employment Definition Classification Battle

The California Attorney General joined a coalition of 17 attorneys general, as well as state and local labor agencies, in a comment letter in support of a U.S. Department of Labor (DOL) proposal to strengthen federal protections against worker misclassification.

In filing the comment letter this month, California joins the attorneys general of Massachusetts, New York, Pennsylvania, Colorado, Connecticut, Delaware, the District of Columbia, Hawaii, Maine, Maryland, Michigan, Minnesota, Nevada, New Jersey, Rhode Island, and Washington, as well as the City of Philadelphia, the Pennsylvania Department of Labor and Industry, and the Washington Department of Labor and Industries.

Worker misclassification occurs when a firm inappropriately treats its employees as independent contractors, thereby evading legal obligations such as minimum wage, overtime, payroll taxes, and workers’ compensation insurance.

Over 26 States (including California after passing AB-5) employ variations of the “ABC” test, which generally provides that individuals who provide services in exchange for remuneration are employees unless all three of the following elements are proven: (A) such individual is free from control over the performance of such service; (B) such service is outside the putative employer’s usual business; and (C) such individual is customarily engaged in an independent trade, profession or business.

However, in 2019, the NLRB adopted a standard (SuperShuttle DFW, Inc., 367 NLRB No. 75 (2019)) that allowed employers to classify workers as independent contractors if they can demonstrate, on balance, that the workers appear to have access to “entrepreneurial opportunity” similar to that of running an independent business.

The NLRB’s 2019 decision set aside a prior, more stringent test (FedEx Home Delivery, 361 NLRB 610, 611 (2014)), for classifying workers as independent contractors. That prior standard held that while multiple factors must be considered, a significant factor in any worker classification analysis was the extent to which an employer controls an individual’s work.

During President Trump’s administration, the DOL issued a final rule clarifying when workers are independent contractors versus employees. The rule applied an economic-reality test that primarily considers whether the worker operates his or her own business or is economically dependent on the hiring entity.

The standard was slated to take effect in March 2021, but President Joe Biden’s administration issued rules delaying and ultimately withdrawing the standard.

However, the Coalition for Workforce Innovation (a group that represents Uber, Lyft and other gig-economy businesses) and other similar business groups convinced Judge Marcia Crone of the U.S. District Court for the Eastern District of Texas to reinstated the Trump administration’s rule, which she did in a 43 page March 14 order, finding that the Biden administration’s actions violated the Administrative Procedure Act (APA).

In the Attorney General comment letter, the coalition urges DOL to act swiftly on its proposal to rescind and replace a Trump-era rule regarding independent contractor status, which they say put workers at increased risk of misclassification by unlawfully broadening the definition of an independent contractor and upending previous standards implemented under the federal Fair Labor Standards Act (FLSA).

The attorneys general, among other things, assert:

– – The proposed rule is consistent with the text and purpose of the FLSA, legal precedent, and prior DOL guidance;
– – Replacing the Trump-era rule, which (they say) was contrary to law, with the current proposal will restore clarity for workers, businesses, and the public;
– – Through the economic reality test, the proposed rule offers strong protections against workers being improperly classified;
– – DOL took appropriate steps to thoroughly analyze alternative potential regulatory approaches and the current proposal is necessary to achieve consistent application of the FLSA; and
– – DOL should act swiftly to adopt the proposed rule.

Thus, the rules defining what is and is not an “independent contractor” remain controversial and to some extent volatile and uncertain in many jurisdictions. The final rule by the DOJ in the current chapter of the classification battle continues, with now 17 Attorney Generals supporting a more liberal definition of employee status.

California Joins 17 States in Employment Definition Classification Battle

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