In February, the Department of Labor (DOL) and National Labor Relations Board (NLRB) moved towards mirroring initiatives from the first Trump Administration, bringing back more employer friendly regulatory rules concerning worker status.

DOL Independent Contractor Reversion to “Economic Reality” Test

The Fair Labor Standards Act's (FLSA) Independent Contractor Classification Rule seeks to readopt the 2021 “economic reality” test to define who is an independent contractor or employee. The test utilized during the Biden Administration, using “totality of circumstances analysis”, can be reviewed here.

The proposed test looks at two core factors:

• The nature and degree of the worker’s control over the work performed for the potential employer; and
• The worker’s opportunity for profit or loss based on his or her initiative or investment in the work.

The first factor weighs the degree of control the worker has over key aspects of the work, like setting the schedule, selecting projects, and the ability to work for others including competitors. The more control the worker exhibits, the more likely he will be considered an independent contractor.

The proposed rule does clarify that requirements such as demanding the worker to “comply with specific health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy similar terms that are typical of contractual relationships between businesses does not constitute control” tipping the balance in favor of one classification versus the other.

The second factor considers the extent to which the worker has an opportunity to earn profits or incur losses based on his own initiative or management of expenses. Again, the greater the degree of independence, the more heavily this factor favors independent contractor status. If both core factors point towards one classification, the greater the likelihood that the suggested classification is accurate under the proposed rule.

There are other, secondary factors to consider, including:

• The skill required for the work;
• The permanence of the working relationship between the worker and the potential employer; and
• Whether the work is part of an integrated unit of production for the potential employer.

Taken on its face, the proposed rule should alleviate some of the guess work regarding classifications by homing in on the two core factors which could increase the likelihood of a finding of independent contractor status and which can be a beneficial classification for employers to utilize for portions of the workforce.

Companies should keep in mind that the proposed rule is subject to a 60-day comment period through April 28, 2026 and then the DOL will have to review comments and issue a final version. Additionally, the DOL rule would not supersede any local, state, or federal rules that utilize different (and sometimes heightened) standards, like California’s ABC test. Courts are likewise not bound by the DOL interpretation and can utilize their own interpretations of the test as well.

Based on these pitfalls, it’s imperative to consult outside counsel to review classifications.

NLRB Joint Employer Rule Reverts to 2020 Standard

In February 2020, a National Labor Relations Board (NLRB) rule requiring companies to “possess and exercise substantial direct and immediate control” over essential employment conditions to be considered a joint employer came into effect and is now the final rule. During the Biden Administration, a broader standard was suggested—the “Browning-Ferris approach”, which lowered the threshold for a finding of joint employment if there was direct or indirect control—but a federal court vacated it before implementation.

For a successful finding of joint employment, control over the following essential conditions is assessed: 1) Wages; 2) Benefits; 3) Hours of work; 4) Hiring; 5) Discharge; 6) Discipline; 7) Supervision; and 8) Direction. In comparison to the proposed Biden Administration rule, the conditions contemplated are much narrower with less expansive definitions. The final rule also increases the amount of control an entity must have to be considered a joint employer, making it more likely to evade that categorization.

Like the discussion above concerning the DOL rule applicability, the NLRB rule also only applies to determinations of joint employer status under the NLRA, not statuses under other frameworks or rules promulgated by other governmental entities. Best practice remains that companies with contractor-subcontractor, franchise-franchisee, user-supplier, and parent-subsidiary relationships structure engage outside counsel to do a review of agreements and possible liability.

As always, contact your Aon representative to learn more.