Legal Ease: Employee Classification Watch: Changes Coming?
BY MATT DAUS
Whether your driver is an independent contractor (IC) or an employee is a weighty issue for the passenger ground transportation industry. But, is that about to change?
Developments unfolding at the US Department of Labor (DOL) and states like California will affect industry reliance on IC drivers, rescinding the DOL’s current 2021 rule that makes IC classification less strict. There are already varying legal standards at the federal, state, and local levels that may be used to determine whether your driver is an IC or not—with significant consequences for misclassification—but other laws may be enacted involving either the current ABC test for ICs (which many states have adopted), or a clone of California’s Prop 22, which allows companies like Uber and Lyft special exemptions (more on that below). Here’s what we’re watching right now.
The US DOL Proposed Rule: Still Waiting for a Final Decision
Last October, the DOL published a proposed rule to revise its guidance on employee classification under the Fair Labor Standards Act (FLSA). The goal of the Biden administration is to make it more difficult for employers to classify workers as ICs for FLSA purposes. While a revised rule was expected in early 2023, the shake-up in leadership at DOL might be delaying that timeframe.
❱ Twenty-six states use some version of the ABC test in their unemployment laws.The newly proposed rule would establish a non-exhaustive six-factor “economic reality of the whole activity” test: (1) opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the employer; (3) degree of permanence of the work relationship; (4) nature and degree of control; (5) extent to which the work performed is an integral part of the employer’s business; and (6) skill and initiative.
Additionally, the proposed rule states: “Relatedly, the use of a personal vehicle that the worker already owns to perform work—or that the worker leases as required by the employer to perform work—is generally not an investment that is capital or entrepreneurial in nature.” This would eliminate one factor that has been traditionally argued to demonstrate that a driver is an IC.
The Biden administration presumably believes the new rule will withstand judicial scrutiny, although the change would only apply to worker classification under FLSA and will not apply to state wage laws.
A Focus on Employee Protections
In March, President Biden nominated Deputy Labor Secretary Julie Su as the next Secretary of the Department of Labor. Ironically, she held several roles in California, including Labor Commissioner and Secretary of the California Labor and Workforce Development Agency, where she oversaw enforcing the state’s labor laws such as AB5. That legislation, which took effect in January 2020, presumed workers are employees first and placed the burden squarely upon the employer to demonstrate that a worker is an IC only if they can meet all three factors of the ABC test. Even failing one criterion resulted in employee status.
In the wake of AB5 going into effect, many mused that it made it impossible for companies like Uber and Lyft to continue classifying their drivers as ICs. Part B of the test—“Does the worker perform work that is outside the usual course of the hiring entity’s business?”—is the biggest hurdle for transportation network companies (TNCs), which have consistently argued that they are just technology, not transportation companies.
Many California operators supported AB5, but TNCs were not as eager to upend their business models. In response, TNCs pushed for a ballot measure that would offer them an exemption. That measure, Prop 22, was supported by voters in November 2020 and offered a carve-out for app-based drivers for rideshare and delivery companies to use ICs—but not taxis or other for-hire vehicles— while providing these drivers with certain other benefits and protections.
California’s Prop 22: (Mostly) Upheld ... For Now
This past March, a California state appeals court handed a win to TNCs when it upheld Prop 22. Opponents had challenged Prop 22 in state court, alleging its provisions infringe on the California Legislature’s right to enforce workers’ comp laws, and that a provision addressing collective bargaining must pass by a seven-eighths vote in the Legislature and cannot be put in an amendment. In 2021, an Alameda County Superior Court judge agreed, finding Prop 22 is “constitutionally problematic.”
The first trial court, which was later overruled, held that the proposition is invalid in its entirety because it intrudes on the Legislature’s exclusive authority to create workers’ comp laws and violates a specific ballot initiative rule called the “single-subject rule for initiative statutes.”
The state along with industry organization Protect App-Based Drivers and Services (with the backing of Uber and Lyft) appealed the decision. The appellate panel mostly agreed, ruling that the California Constitution does not give the Legislature complete authority over workers’ comp laws or violate the single-subject rule. However, the appellate court panel kept the lower court’s ruling that a provision addressing collective bargaining cannot be put in an amendment that must pass by a seven-eighths vote in the Legislature, concluding “that the initiative’s definition of what constitutes an amendment violates separation of powers principles.” The appellate panel then severed the unconstitutional provisions from the rest of Prop 22, effectively removing any restrictions on the Legislature’s control over collective bargaining.
Prop 22 has been seen as a significant victory for TNCs. However, TNCs will still be required to offer drivers some basic job protections, including minimum earnings, health care subsidies, insurance to cover on-the-job injuries, and vehicle insurance. Prop 22 also preempts local regulation of app-based driver compensation and gratuities; driver scheduling, leave, health care subsidies, and any other work-related stipends, subsidies, or benefits; driver licensing and insurance requirements; and driver rights with respect to a network company’s termination of an app-based driver’s contract. In short, TNCs are not subject to the various regulations of the more than 500 cities and counties in California.
While the proposed DOL rule change will impact companies across the country with respect to federal minimum and overtime wage law, it will have no direct bearing on the tests used by the states and other areas of the federal government to determine collective bargaining and unionization rights, unemployment compensation, workers’ comp, or other labor and employment laws outside the FLSA. The rules for worker classification can differ drastically under the various state laws and must be judged on a state-by-state basis.
Transportation companies should consider that any workers’ comp and unemployment claims will not be affected by the proposed DOL rule change. However, as the use of employee-drivers becomes more widespread, the administrative law judges and regulators could shift away from finding drivers as ICs at all levels of government and enforcement. In those cases, those companies may have causes of action to present constitutional challenges or other civil remedies depending on the applicable local, state, or federal law.
❱ Now is the time for transportation companies that use ICs to minimize risk.Prop 22 is limited to California, but other states have been considering laws like it, with pressure from the TNCs. This will create a patchwork of standards for determining employment status based on the differing outcomes. The federal rule through the FLSA, although expected to be more protective for employees, will only apply to interstate operators engaged in interstate commerce, while local-market operators will likely be reluctant to change business models unless required to do so through enforcement and/or penalties. TNCs generally hope that laws like Prop 22 will apply nationwide, but these attempts have so far fallen flat.
Mass Says No Thanks: Last year, the highest court in Massachusetts struck down a similar ballot initiative in total. According to the newspaper The American Prospect, “It wasn’t, in the end, a case about whether gig workers should be employees or ICs, or about tort liability. It was about the power of well-funded companies to use their bazillions to get their way. In this sense, the broad-based campaign opposing the ballot initiative struck at the crux of the issue when the campaign leaders chose their name: Massachusetts Is Not For Sale. They came together—workers, unions, civil rights and immigrant rights’ organizations, environmentalists, seniors, and more—to make sure that massive out-of-state companies didn’t get to rewrite long-established protective workplace laws.”
New York Is Considering: Bill S2052 has been kicking around the state Legislature since 2021 but hasn’t gained traction. If passed, S2052 would classify workers as employees unless: (a) the worker is free from the control of the hiring entity; (b) the work performed is outside the hiring entity’s bailiwick; and (c) the worker is “customarily engaged” in the type of work he or she is hired to do. California, New Jersey, Massachusetts, and Vermont already use the ABC test in their wage and hour laws. Twenty-six states use some version of the ABC test in their unemployment laws. Ten states, including New York, apply it broadly to labor laws within a particular sector, typically construction or landscaping.
It will be important for businesses that use ICs to coordinate with legal counsel to develop a strategy that works best among this patchwork of obligations. Companies should be looking at their driver agreements and worker classification practices to see how they align with current and proposed new rules. Proactive measures for compliance will be the key to success. [CD0523]
Disclaimer: The foregoing is provided solely as general information, is not intended as legal advice, and may not be applicable within your jurisdiction or to your specific situation. You are advised to consult with your attorneys for guidance before relying upon any of the information presented herein.
Matt Daus is a senior partner at Windels Marx Lane and Mittendorf, and founder/chair of the Transportation Practice Group. He can be reached at firstname.lastname@example.org.