New Rules on Independent Contractors Could Affect Trucking's Owner-Operator Model

02/07/2024

New Rules on Independent Contractors Could Affect Trucking's Owner-Operator Model

Is that truck driver an employee or an owner-operator? The U.S. Department of Labor’s final rule on determining independent contractor status outlines six factors to be analyzed in a multi-factor approach to defining whether a worker is an employee or IC.

In a final rule published in the Federal Register on Jan. 10, the DOL changed its Wage and Hour Division regulations on determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act.

The new rule provides guidance on how six economic reality factors should be considered in making an IC vs employee determination. The department has adopted a “totality of the circumstances” analysis, so no single factor should make or break an IC determination, and additional factors may be considered.

The six factors are:

  1. Opportunity for profit or loss depending on managerial skill.
  2. Investments by the worker and the potential employer.
  3. The degree of permanence of the work relationship.
  4. The nature and degree of control.
  5. The extent to which the work performed is an integral part of the potential employer’s business.
  6. Skill and initiative.

“This rule is not intended to disrupt the businesses of independent contractors who are, as a matter of economic reality, in business for themselves,” said the Department of Labor in its final rule.

The final rule emphasized the multi-factor approach again and again. In summarizing comments on the proposal, the Labor Department explained that the department would not include requested industry-specific carve-outs, because failing to meet any of the standards outlined doesn’t automatically force an employee classification.

Replacing Trump-Era IC Definition

The new rule repeals and replaces a 2021 Trump administration rule that was welcomed by trucking but which critics said made it harder to prove employees were being “misclassified” as independent contractors. That previous rule simplified the definition and set up two “core factors” to use in making the determination:

  • Nature and degree of control over work.
  • Opportunity for profit or loss based on initiative and/or investment.

The Biden Administration tried to withdraw the rule, published shortly before President Bident took office, but was blocked by a court ruling from doing so. So, the Department of Labor started the rulemaking process all over again and issued a proposed rule in October 2022, which many in the industry said would make it harder for trucking companies to demonstrate the independent contractor status of their owner-operator drivers.

The final rule is only “incrementally” better than the original proposal, according to the transportation attorneys at Scopelitis, Garvin, Light, Hanson & Feary.

“As compared to the initial proposed rule, there were some incrementally positive changes in response to comments filed by commenters... though not enough to make the final rule favorable on balance,” said the firm in an email to industry stakeholders.

No ABC Test

The good news is that the department did not implement a restrictive “ABC test,” where all three factors must be met in order for a worker to be deemed an independent contractor.

Trucking Looks for Solutions to California's Stringent New Independent Contractor Rules

The Supreme Court has previously ruled that the economic reality test is the standard that should be used in determining workers’ classification under the FLSA, looking at "the circumstances of the whole activity" rather than the three isolated factors in an ABC test.

The Department explained that it could only implement an ABC test if the Supreme Court revisits its precedent or if Congress passes legislation changing the FLSA.

The rule is scheduled to be effective 60 days after publication, or March 11. However, Scopelitis anticipates business groups will go to court to challenge DOL’s authority to issue this regulation.

Trucking Concerns About the Owner-Operator Model

The Intermodal Association of North America said the new requirements “threaten to force the reclassification of over 80% of intermodal drayage drivers that currently enjoy independent contractor status.”

“For decades, the independent contractor business model has been widely favored by intermodal motor carriers and drivers,” said IANA President and CEO Joni Casey in a statement. “Although employee-driver positions are readily available, these owner-operator drivers explicitly chose the freedom, flexibility, and independence that comes with small business ownership.”

The American Trucking Associations has vowed to fight the new rules.

“I can think of nothing more un-American than for the government to extinguish the freedom of individuals to choose work arrangements that suit their needs and fulfill their ambitions,” said ATA President and CEO Chris Spear in a statement. “More than 350,000 truckers choose to work as independent contractors because of the economic opportunity it creates and the flexibility it provides.

“It's unfortunate that the administration has chosen to replace a clear and straightforward standard with a tangled mess that weakens our supply chain and undermines the livelihoods of hundreds of thousands of truckers across the country," Spear said. “ATA will work with members of Congress and other stakeholders to defeat this ill-advised rule.”

'Confusing and Conflicting System'

The Transportation Intermediaries Association released a statement saying, "Independent contractors play a pivotal role within our nation's supply chain, serving as essential cogs in its seamless operation. Logistics companies depend significantly on their contributions to the supply chain and workforce. The notion of reclassifying these vital independent contractors as employees and creating a confusing and conflicting system to determine employment status poses a grave threat to the well-being of the supply chain, small businesses, and the American economy."

Owner-Operator Independent Drivers Association President Todd Spencer criticized the uncertainty that changing regulations create.

“Truckers are tired of the endless parade of classification rules that do not listen to their concerns,” Spencer said in a statement. “This constantly changing landscape has created uncertainty that makes it more difficult for them to operate their businesses.”

Spencer said the association is still reviewing the details of the final rule, but it’s concerned that some of the details “may disregard specifics of the trucking industry and could lead to the reclassification of independent contractors as employees.

“With that said, we support the Department’s stated intent to follow decades-long practices for classification under the Fair Labor Standards Act, as well as its rejection of the ABC test as signed into law in California with AB5.”

How We Got Here

Congress enacted the Fair Labor Standards Act in 1938 to eliminate “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers.”

The FLSA generally requires employers to pay nonexempt employees at least the Federal minimum wage for all hours worked and at least one and one-half times the employee’s regular rate of pay for overtime. The act also requires covered employers to maintain certain employee records and prohibits retaliation against employees who are discharged or discriminated against after, for example, filing a complaint regarding their pay.

However, the FLSA’s protections do not apply to independent contractors. And the act did not define “independent contractor.”

It does include definitions of:

  • Employer: Any person acting directly or indirectly in the interest of an employer in relation to an employee.
  • Employee: Any individual employed by an employer.
  • Employ: “To suffer or permit to work.”

Since the 1940s, the Labor Department and courts have applied an economic reality test to determine whether a worker is an employee or an independent contractor under the FLSA. The ultimate inquiry is whether, as a matter of economic reality, the worker is economically dependent on the employer for work (and is thus an employee) or is in business for themself (and is thus an independent contractor).

In assessing economic dependence, the DOL explained, courts and the department have historically conducted a totality-of-the-circumstances analysis, considering multiple factors to determine whether a worker is an employee or an independent contractor, with no factor or factors having predetermined weight. These factors generally include the opportunity for profit or loss, investment, permanency, control, whether the work is an integral part of the employer’s business, and skill and initiative.

However, In January 2021, the Department published a rule titled “Independent Contractor Status Under the Fair Labor Standards Act” (2021 IC Rule), providing guidance on the classification of independent contractors under the FLSA. It marked a departure from the longstanding use of the economic reality test and instead identified five economic reality factors, with two being defined as "core factors." This rule was generally viewed by trucking to be favorable for the owner-operator model.

Because the rule was a so-called “midnight rule” published in the final days of the Trump administration, the incoming Biden administration tried to withdraw the new rule later that year.

But the administration lost in a court challenge in 2022 that ruled the 2021 law had gone into effect on March 8, 2021, resulting in the rulemaking process that has given us this final rule.

Heavy Duty Truckinginfo: Deborah Lockridge

 

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