Labor Department tackles employee classification; AB5 may not be affected

Independent owner-operators in California have been exempt from AB5 since the law went into effect Jan. 1. Its implementation has been blocked from the trucking sector by a preliminary injunction that found a separate federal law, the so-called F4A, prevented the regulation of trucking involved in interstate commerce. That preliminary injunction is being challenged by the state and the Teamsters, and concerns have been raised that their arguments may prevail.

Fisher Phillips also downplayed the potential impact on AB5 or laws in other states like it. “Even if the rule gets put into place as proposed, it will not overturn worker-friendly state laws like California’s AB5 and the infamous ABC Test, which make it quite difficult for businesses to rely upon contract labor for many jobs,” the law firm wrote.

Particular impact in states with loose definitions of contractors

Noah Finkel, a partner with the law firm of Seyfarth Shaw, said the impact of the rule would differ from state to state. “Let’s say you have a worker in Nevada or Arizona that doesn’t have AB5,” Finkel told FreightWaves. “This FLSA interpretation has a lot more bite and effect on the company’s operations.”

A company will need to comply with state and federal law, “and in some cases that’s easy because the state doesn’t have a definition that is different from federal law,” Finkel said. 

Greg Feary of the law firm of Scopelitis Garvin Hanson Light & Feary noted that there had been conflicting guidelines coming out of the Obama administration and then the Trump administration regarding classification, as interpreted by federal regulators. But Feary added that the guidance was just that: guidance. It was not law. What is being proposed by DOL would be codified into law. 

Feary drew a parallel to minimum wage laws in discussing how federal and state rules could coexist. The federal law sets the floor but a state law can enact more stringent laws, and state laws would not be preempted by federal law,” Feary said. But he conceded that there could be issues that would arise: “In theory the state could find the workers as employees while the federal law test could find them to be ICs,” Feary said.

The announcement from DOL of the proposed change — known as an advance notice of proposed rulemaking — was accompanied by an almost 160-page document spelling out the legal history of federal guidelines and court cases on the question of contractor versus employee. It is a prelude to a formal proposal of rulemaking, expected to be released in a matter of days through the Federal Register. There will then be a 30-day comment period.

Fed guidance has been sparse

“Because the FLSA’s text does not provide a clear definition [of independent contractors], it largely has been up to the courts to define ‘employee’ under the FLSA,” the law firm of Seyfarth Shaw wrote in a commentary on the DOL proposal. Various federal courts have used an “elastic, multifactor test” with “divergent” outcomes. The Wage-Hour Division of DOL has been “relatively silent” on the issue, it said.

The end result is a lack of federal guidance on what constitutes an independent contractor, superseded by state laws like AB5 and a body of opinions from court cases, like the Dynamex case that led to the ABC test adopted in AB5 in California.

Even if the DOL rule is adopted, it does not settle all disputes, Seyfarth Shaw said. “DOL interpretations are not controlling law and do not give license to companies to classify all workers as contractors,” the law firm wrote. But that does not mean they have no value. “The interpretations would provide clearer guidance for companies and in many cases could minimize the chances that courts apply the FLSA definition of employee to workers who seemingly should be allowed to be treated as contractors,” it said. 

The most important provision in the ABC test for trucking, and which then was codified in AB5, is the so-called “B prong.” The guidance in the B prong is that a company hiring an independent contractor to perform activities at the core of its operations should consider that contractor an employee. That is of particular relevance to a trucking company hiring an independent owner-operator to move freight. It is not relevant to a trucking firm hiring an accountant to audit its records, since accounting is not the company’s primary activity. Trucking is. 

The key guideline in the new DOL rule is an existing legal standard called the “economic realities” test. As Seyfarth Shaw summarizes it, the two “core factors” from the economic realities test would be “the nature and degree of an individuals’ control over the work” and “the individual’s opportunity for profit or loss.” 

The three other parts of the economic realities test involve the amount of skill needed for the job, the “degree of permanence” in the relationship and “whether the work is part of an integrated unit of production.”

An ability to profit from their work was one of the few issues addressed by DOL in its document that specifically involved trucking. DOL cited an earlier case, U.S. v. Silk, that dates back to 1947 that found drivers in a coal company’s operation were judged to be independent contractors “in part because they invested in their own trucks” and, citing the decision, had an “opportunity for profit from sound management” of the truck. That was contrasted with other workers in the coal company’s operation whose activities didn’t have that flexibility.

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