Executive Summary: On May 6, 2021, the United States Department of Labor (DOL) withdrew proposed rules set by the Trump Administration, which were originally intended to revise the test for classifying workers as independent contractors at the federal level for wage and hour purposes under the Fair Labor Standards Act (FLSA). The DOL’s withdrawal alleges that the rules, which were originally set to take effect on May 7, 2021, would have been contrary to the FLSA’s text, purpose, and judicial precedent.

Background
Under the FLSA, employees are entitled to minimum wage, overtime pay and other benefits. Independent contractors, in contrast, are not entitled to such benefits, however, they generally have more flexibility to set their own scheduled and work for multiple companies. The Trump-era rules, which never took effect, would have largely maintained the “economic realities” test to determine whether a worker is in business for himself/herself (an independent contractor) or is economically dependent on the employer for work (an employee) for purposed of the FLSA by considering the following factors:

1. The extent to which the services rendered are an integral part of the principal’s business.
2. The permanency of the relationship.
3. The amount of the worker’s investment in facilities and equipment.
4. The nature and degree of control by the principal.
5. The worker’s opportunities for profit and loss.
6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the worker.
7. The degree of independent business organization and operation.

Although none of the above factors are stringent requirements, the Trump-era rules would have emphasized the importance of the degree of control asserted by the principal and the worker’s opportunities for profit and loss (the 4th and 5th factors in the above analysis). Numerous businesses, especially those in the gig economy, would have benefitted significantly from these rules, which would have de-emphasized the focus on whether the services are an integral part of the principals business, the permanence of the relationship, the degree of investment by the worker, the amount of independent judgment utilized by the worker, and the degree of independent business organization/operation (Factors 1-3 and 6-7).

Employer Considerations
While the DOL’s withdrawal of the Trump-era rules simply means that these changes will not take effect, employers should stay up to date on ongoing changes in this body of law, as they may signal that the Biden Administration will, sooner or later, seek more stringent requirements and/or interpretations of existing law, just as the Trump Administration sought less restrictive ones. In fact, many states, including California and Massachusetts, now apply more stringent test to determine whether a worker is an independent contractor or employee. Similarly, Virginia law now recognizes a presumption that workers qualify as employees.

Virginia’s Independent Contractor Law
In 2020, the Virginia legislature passed comprehensive legislation, effective July 1, 2020, which presumes a worker who performs services for pay qualifies as an “employee” unless the employer proves otherwise under IRS “independent contractor” rules. Additionally, effective July 1, 2020, under Va. Code § 40.1-28.7:7 a worker can now bring legal action against an employer for misclassifying them as an independent contractor, with the potential for the worker to recover their attorneys’ fees. In order to prevail on a claim, a worker must show the employer had “knowledge” of misclassification. While the statute text does not explain whether “knowledge” means actual or constructive knowledge of a misclassification, if successful, this challenge would convert the worker from an independent contractor classification into an employee with full benefits. Similarly, Va. Code § 40.1-33.1 prohibits employers from retaliating against employees or independent contractors who: (1) report or plan to report that their employer misclassified them; or (2) are requested or subpoenaed to participate in an investigation or court action related to a misclassification claim.

Further, Virginia may now use this employee presumption to pursue employers for back taxes for independent contractor misclassification. Specifically, employers are required to pay the designated taxes unless the employer demonstrates to the tax department’s satisfaction that their 1099-designated workers qualify under the IRS guidelines as an independent contractor. Employers who misclassify employees and therefor fail to pay the proper employment taxes, benefits or other contributions are also subject to a civil penalty, up to and including $1,000 per misclassified individual for a first offense and $5,000 per misclassified individual for a third or subsequent offense. Accordingly, Virginia employers should continue to monitor regulations from the DOL as well as state level legislation in order to ensure compliance with evolving federal and state requirements pertaining to the classification of independent contractors.

© 2021 FordHarrison LLP

John G. Kruchko is a partner with the Labor & Employment Law Firm of FordHarrison LLP in Tysons Corner, Virginia office; Max Bernas is an associate in the firm’s Washington, DC and Tysons Corner offices. Jack Schaedel, a partner in the firm’s Los Angeles, California office, prepared an original version of this article. For more information, please contact Mr. Kruchko or Mr. Bernas at (202)719-2048 or by email at jkruchko@fordharrison.com or kmbernas@fordharrison.com. This article is published for general information purposed and does not constitute legal advice.