USDOL’s New Independent Contractor Final Rule is DOA, Or Is It? Not So Fast!

On Thursday, January 7, 2021, the U.S. Department of Labor (“USDOL”) published its long-awaited Final Rule in the Federal Register revising its interpretation of independent contractor (“IC”) status under the Fair Labor Standards Act (“FLSA”). Significantly, the Rule is NOT scheduled to go into effect until March 8, 2021, AFTER President-elect Biden will have been sworn in as the 46th President of the United States. While the new Final Rule would give employers and workers greater flexibility to arrange their work relationships, it is unlikely to survive, absent court challenge, since President-elect Biden has already vowed to immediately retract it once he becomes President.

Retracting the new Trump Rule would leave existing Obama-era Rules in place defining who are “employees” and who are ICs. However, retracting the new Trump Rules could carry legal uncertainty for President-elect Biden, depending on how he proceeds to retract the new Trump Rule. For those who wish more detail on the law surrounding attempted rescissions of “Midnight regulations”—like the Wage Hour IC Rule and the potential long path of litigation which could haunt the IC Final Rule—we discuss the intriguing and not well-defined legal rules which attach to the revocation of Rules when this article converts, below, to a blog.

Employers could potentially be witness to a long and tortured path of litigation and continued uncertainty as to how to proceed if and when then President Biden “freezes” the IC Rule sometime on or after January 20, 2021. As we discuss in the Blog, though, there is one quick and relatively risk-free approach available to the Biden Administration via a little-used Congressional Review Act (“CRA”) disapproval statute. In the meantime, the Final IC Rule is not currently “legally effective,” it is not rescinded (yet) and it may or may not ever become legally effective. However, if a CRA disapproval law fails or does not go forward for whatever reason, it is most likely that employers will watch for years the Final IC Rule become the subject of an occult Administrative Procedure Act (APA) lawsuit challenging any rescission of the Final Rule the USDOL Wage Hour Division (WHD) may eventually order.

Contents of Final Rule

We previously discussed the proposed independent contractor rule here, and its difference in comparison to the FLSA’s prior “economic reality” test. The Final Rule adopts the simplified test, as proposed. If the Rule becomes legally effective, you will eventually find it in a new part (part 795) to Title 29 of the Code of Federal Regulations as interpretive guidance to the Wage-Hour Division of the USDOL. We have not recounted the new Rules here because you may read them on the above link and because it is highly unlikely these Rules will become legally effective in the near term.

What Comes Next

Unfortunately for employers ready to convert their business practices in response to this Final Rule, the incoming Biden Administration has already indicated the Final IC Rule will be one of the first the Biden team will attempt to block. On December 30, 2020, the BNA Daily Labor Report carried a story that President-elect Biden’s Press Secretary, Jen Psaki, had announced Biden’s intent to issue and make effective on Inauguration Day a memorandum that would block ALL regulatory actions the Trump Administration had taken but which had not yet become legally effective, including the WHD’s Final IC Rule.

The legal uncertainty surrounding Final Rule rescissions springs from the fact that the APA and existing Presidential Executive Orders impose rules and conditions on federal agencies requiring them to put forward proof to lawfully rescind an existing Final Rule, EVEN ONE sent to “Final” but not yet “legally effective” before a new political Administration takes office. It is only recently, however, that this issue of the legal status of so-called “Midnight regulations” came to the fore. As President Carter abruptly and unexpectedly failed to win a second term when running against Ronald Reagan in the 1980 Presidential election, several significant Carter-era Final Rules got caught in the squeeze of time as President Carter hurriedly tried to finish his Presidency which ended 4 years earlier than he had planned.

Among the issued “Midnight regulations” hastily thrown together for publication in the Federal Register in “Final” after the surprise loss to Reagan in November 1980, were OFCCP Affirmative Action Plan Rules which had drawn the scorn of the federal contracting community. Nonetheless, OFCCP published its Final Rules in the Federal Register in “Final” form on December 30, 1980…making them nine days short of becoming legally “effective” 30 days later BEFORE President Reagan’s Inauguration on January 20, 1981.

(NOTE: Thirty days is the minimum period of time the APA normally requires a Final Rue to incubate after having been published in “Final” form in the Federal Register. This lapse of time between a “Final” and “legally effective” Rule is designed to give the public notice of the coming change before the Rule becomes “legally effective” and binds the public to a new course of action. While the APA also permits Rules affecting health, safety and national security to go into effect “immediately” as an “Emergency Rule,” federal agencies may (and also frequently) exercise their discretion to prescribe longer periods of time, perhaps 60 days or even 180 days, before the Final Rule becomes “legally effective.” Federal agencies adopt these longer periods of time allowing the public to adapt to their Final Rules if the Rules are particularly complex or the time needed to transition corporate or personal behavior, practices and/or systems is expected to take longer than 30 days.)

In a new legal/political maneuver never previously seen, newly sworn-in President Ronald Reagan issued an Order on January 28, 1981 (eight days after being sworn into Office), “freezing”—until further notice–all of the Carter “Midnight regulations” which had not yet become “legally effective,” including OFCCP’s December 30, 1980 Final Rules. Three weeks later, President Reagan issued Executive Order 12291 codifying the treatment of all such Carter “Midnight regulations.” (EO 12291 was also a watershed Order with lasting effect to this day in that it continued a trend President Carter had begun to modernize and professionalize federal agency Rulemakings. Until the 1970s, Rulemakings had previously been largely unregulated. Rather, they comprised a helter-skelter patchwork of processes largely unique to each agency. Since the Congress originally passed the APA in 1946 on the heels of the New Deal which had created and started to build the large federal bureaucracy we know today, the emerging and maturing federal agencies each began to slowly fashion better and more consistent rules of engagement. It was left to President Carter, a highly intelligent former submarine officer dedicated to consistent, repeatable protocols, attention to detail, and rigorous processes and President Reagan, one of the most experienced big government managers to ever reach The White House as the former Governor of California, then the fifth largest economy of the world, to modernize and make routine federal agency Rulemakings.

EO 12291 thus suddenly lifted the White House’s Office of Management & Budget (“OMB”) out of the shadows and obscurity and gave it the key role within the federal Executive Branch to allow the President effective oversight in fact of every federal Executive agency Rule. EO 12291 thus made OMB the final arbiter of Executive Branch authority. And significantly, Court decisions pursuant to the APA and subsequent Executive Orders of Presidents who followed President Reagan have now baked-in and codified most of the principles and rules of engagement EO 12291 initially set out.

At the time in early 1981, and to this day, no one was or is quite sure what to do with “frozen” Final Rules. The Superintendent of Documents of the Government Printing Office, publisher of the Code of Federal Regulations, did not know how to proceed following President Reagan’s order freezing all of the Carter “Midnight regulations.” So, he hedged his bets by publishing the “Final” but not yet “legally effective” “frozen” Carter regulations in the rear of the CFR Rule books and noting that their status was legally uncertain. (As to the OFCCP’s frozen 1980 Carter regulations, the Clinton Administration formally withdrew these “frozen” Rules almost 20 years later in 2000 as it was leaving office).

Significantly, too, EO 12291 created the notion of a “Major rule,” defined it, and required special analyses and justifications to implement and also to withdraw Major Rules:

Section 1 (b) “Major rule” means any regulation that is likely to result in: (all caps in original)

(1) An annual effect on the economy of $100 million or more;

(2) A major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies, or geographic regions; or

(3) Significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreign-based enterprises in domestic or export markets.

As to pending regulations, Section 7 of EO 12291 put the brakes on all Carter “Midnight regulations” but, importantly, prescribed detailed procedures for federal agencies to first “reconsider” and then possibly “rescind” the Final Rule, upon reflection of the Rule as measured against Congressional intent in passing the statute the Rule purports to faithfully implement:

“Sec. 7. Pending Regulations.

(a) To the extent necessary to permit reconsideration in accordance with this Order, agencies shall, except as provided in Section 8 of this Order, suspend or postpone the effective dates of all major rules that they have promulgated in final form as of the date of this Order, but that have not yet become effective, excluding:…” (all caps in original)

Respectful of the APA’s requirement that agencies have to have substantial reasons to change a prior existing exercise of a federal agency’s discretion to interpret a Congressional statute the agency is charged to enforce, EO 12291 required the federal agencies to undergo a rigorous process to rescind. Federal agencies do not have the legal authority to just willy-nilly wave a magic wand and declare “Poof. It is hereby rescinded because I don’t like it. It is just more of that junk from those terrible people who were here just ahead of us and who lost. Like Dude, WE WON, and they didn’t! Remember? Too bad for them, it all changes now since the enlightened ones have finally arrived!” No, it just does not work like that. Here is how EO 12291 prescribed rescission processes…rules which are now part of APA law and procedure:

“(c) The Director [of OMB], subject to the direction of the Task Force, is authorized, to the extent permitted by law, to: (all caps in original)

(1) Require reconsideration, in accordance with this Order, of any major rule that an agency has issued in final form as of the date of this Order and that has not become effective; and

(2) Designate a rule that an agency has issued in final form as of the date of this Order and that has not yet become effective as a major rule in accordance with Section 1(b) of this Order.”

What Can the Biden Administration Do If It Wants to Rescind the Trump IC Rule?

There are several options available to the Biden Administration, including at least these three:

First, the USDOL, in a Biden Administration, could re-open the rulemaking by requesting additional public comment. By allowing additional public comment, the USDOL could then seize upon those comments to suggest to any reviewing court that the Trump WHD exercised its discretion in error as to the true record of public comments about how the Rule applied the Congressional intent underlying the FLSA to workers in this modern age of technology. WHD would then argue that it was left with no choice other than to rescind, amend and publish a new Rule to reflect a standard more in keeping with the Congressional intent (which happily, the WHD would argue, just happened to parallel the Biden Administration’s stated intent to restore a more pro-worker agenda). REMEMBER: In Rulemaking, it is not important what the guy in the White House thinks ought to happen. Rather, the federal agency charged with the authority and responsibility to implement and enforce a statute the Congress has passed and the President has signed into law, MUST reflect in its Rule the Congressional intent set out in the statute the agency is enforcing. It is the Congress’ statute: not the President’s. So, absent proof that the new Trump Final IC Rule was unfaithful to Congress’ intent in passing the FLSA, and its applicable amendments, a federal reviewing Court should order it to stand.

Second, alternatively, given the Democrats’ control of both the Senate and the House of Representatives, the Biden Administration could overturn the Final IC Rule via the Congressional Review Act (“CRA”). That relatively unused tool, which Republican Speaker of the House Newt Gingrich introduced and President Bill Clinton signed into law in 1996, requires only a majority vote of both the Senate and the House to pass a bill disapproving a Final Executive Branch Rule within 60 “legislative days” from the time the agency published the Final Rule in the Federal Register. This legal tool is the fastest, cheapest and least legally risky approach ahead for Team Biden. By contrast, the CRA is the most difficult and feared approach for employers to defeat if they favor the Trump WHD Final IC Rule.

Finally, the Biden Administration could decide to rely on litigation brought by employee rights organizations and/or unions seeking an injunction on the Final Rule’s implementation, a legal tactic that has been particularly effective against several recent Trump Administration actions, and most recently to strike down OMB’s rescission of the Obama EEOC’s EEO-1 Component 2  “hours worked” and “pay data reporting” requirement.

Tell Me Again. How Did We Get to This Messy Fork in The Road?

First, unforgivably, the Trump Administration waited six months too long to publish its Final IC Rule and bring on all this legal angst.

Second, who is an independent contractor has long been a frustrating question for employers, and increasingly workers, in the so-called “Gig economy.” Both factions often want greater freedom to arrange their working relationships differently from the centuries old notions of the “master-servant” relationship which underlies the FLSA’s definition of who is an “employee.” Determining whether an individual is an employee or independent contractor is a very laborious (read expensive) fact-specific inquiry. Furthermore, depending upon the context, courts and federal agencies could apply one or even a blend of several different legal tests to make their determination (the widely popular common law “right of control” test which OFCCP has also informally adopted, the “20-factor test” the Internal Revenue Service uses for payroll tax purposes, the “economic realities” test used pursuant to federal (and many) wage-hour laws, or state-specific tests state courts sometimes apply to state wage-hour laws).

As the U.S. Supreme Court noted over 75 years ago, “Few problems in the law have given greater variety of application and conflict in results than the cases arising in the borderland between what is clearly an employer-employee relationship, and what is clearly one of independent entrepreneurial dealing.” NLRB v. Hearst Publications, 322 U.S. 111, 121 (1944). And nothing has changed in the last three-quarters of a century since Justice Rutledge penned those famous and ever-so-true words…until the Trump WHD Final IC Rule.

Further compounding employer anxiety over the subject has been the high financial cost to answer incorrectly the question: “Who is an Employee?” Misclassifying an individual as an independent contractor can potentially lead to claims of unpaid wages and liquidated damages. Moreover, employers are often left to the workers’ representations as to hours worked since the company does not normally maintain time reports as to workers they believe to be independent contractors.

And most importantly, the FLSA often too rigidly interferes with the way both employers and workers would prefer to arrange their service relationships. Many employers fight IC misclassification cases not because of the often-steep financial punishment for misclassification, but rather because the FLSA’s traditional definition of the term “employee” interferes with the way services are supplied but for governmental interference. On many IC cases, these days, the government and/or private plaintiffs’ lawyers are the “odd-man-out,” stopping workers and employers from knowingly and consciously entering into service arrangements benefitting them and their customers, all three, but which run afoul of traditional interpretations of the FLSA and comparable state wage laws defining “Who is an employee?”

THIS COLUMN IS MEANT TO ASSIST IN A GENERAL UNDERSTANDING OF THE CURRENT LAW AND PRACTICE RELATING TO OFCCP. IT IS NOT TO BE REGARDED AS LEGAL ADVICE. COMPANIES OR INDIVIDUALS WITH PARTICULAR QUESTIONS SHOULD SEEK ADVICE OF COUNSEL.