In September, we discussed the Department of Labor’s announcement of a then-proposed rule offering the agency’s interpretations of whether a worker is an independent contractor for purposes of the Fair Labor Standards Act (FLSA). In the waning days of the administration, the Trump DOL published its proposal as a final rule to take effect on March 8, and my TL;DR take was: this rule will never take effect.
On December 30, 2020, the Trump DOL also issued a controversial final rule entitled “Tip Regulations Under the Fair Labor Standards Act (FLSA)” that would have substantially changed how the FLSA would apply to tipped workers. Several states and the District of Columbia quickly filed suit to enjoin the rule, and I did not even cover it in detail because I saw little chance the content of the rule would matter.
With Congress focused on the third round of stimulus and other matters, the DOL did not wait for a Congressional Review Act resolution invalidating these rules. Late last week, it formally delayed the tip rule from March 1, 2021 until April 30, 2021. This week, the DOL formally delayed the effective date of the Independent Contractor Final Rule, from March 8, 2021 to May 7, 2021.
Summary of the Trump Tip Rule
The tip rule was more controversial than the independent contractor rule, as it would have upended substantial portions of the FLSA regulations, including:
- Removing portions of the regulations that prohibited employers from creating tip pools that include employees who do not customarily and regularly receive tips;
- Codifying in the regulations recent guidance explaining that an employer may take a tip credit for time that an employee in a tipped occupation performs related but nontipped duties, either contemporaneously with or for a “reasonable time” immediately before or after performing tipped duties;
Not everything in the rule was negative for employees and positive for employers, though. The rule would have added new recordkeeping requirements, require employers to promptly distribute tips with wages, and prohibit employers (including managers and supervisors) from keeping tips.
Summary of the Independent Contractor Rule
The final independent contractor rule clarifies the test to determine whether a worker is an employee or an independent contractor, swinging the pendulum back toward the latter in a move reminiscent of the seesaw employers ride with the NLRB during every change of administration. See the September post linked above for more expansive discussion, but in short, the final rule from the DOL:
- Economic reality test. Reaffirms the “economic reality” test to determine whether an individual is running their own business (an independent contractor) or is economically dependent on a potential employer for work (an employee covered by the FLSA).
- Core factors. Identifies and explains the two “core factors” that DOL gives the most weight when determining whether a worker is economically dependent: the nature and degree of the individual’s control over the work and the individual’s opportunity for profit or loss. The DOL’s rule attempts to the parties’ actual practice rather than what may be contractually or theoretically possible. This can cut both ways, of course.
- Other factors. Identifies three “other factors” that can help when the two core factors point in opposite directions: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the worker and the potential employer (but not the indefinite or continuous nature of the engagement); and (3) whether the work is part of an “integrated unit of production.”
The DOL’s Rationale for Delays
In a memorandum dated January 20, 2021, and titled “Regulatory Freeze Pending Review,” the White House directed the heads of Executive Departments and Agencies to consider delaying the effective dates of all regulations that had been published in the Federal Register but had not yet taken effect.
In both cases, the DOL noted that allowing more time to consider the complex issues raised by the rules was reasonable in light of the Regulatory Freeze Memorandum and the inability of the DOL to initiate a notice-and-comment process for a delay. In the case of the tip rule, delayed implementation would give the DOL more time to review the issues of law raised in the federal complaint filed by state AGs and the District of Columbia alleging that the DOL violated the Administrative Procedure Act in promulgating the final tip rule.
Employer Takeaways: These Rules Will Never Take Effect (in their current form)
As I mentioned before, this Congress could still simply repeal either or both rules under the 1996 Congressional Review Act within 60 “session days” (days in which Congress is in session). Even absent CRA action, the Biden administration seems likely to delay and/or revise both rules before their effective dates. Ultimately, do not expect the DOL to promulgate either of these Final Rules in their current form. If they take effect eventually, expect them to be revised to make it more difficult to classify workers as independent contractors and to tighten restrictions on tip credits and delays in paying out tips.
So, keep an eye on these rules in the coming months, but not for what they currently contain. Remember, too, that whatever the Biden administration promulgates (if anything), neither rule would preempt state laws like those in California, New Jersey, or Illinois that are more protective of workers.