January 12, 2021

Another Shift on Joint Employment and Independent Contractors

Holland & Knight Transportation Blog
Linda Auerbach Allderdice | Michael T. Maroney | Lawrence J. Hamilton II
Election Impacts on Transportation & Infrastructure with Transportation themes

For updates to this blog, please read: "DOL Delays Trump Administration's Independent Contractor Rule" and "Ninth Circuit Decides Federal Law Preempts California Meal and Rest Break Rules."


Four years ago, the question was raised of whether the then-incoming Trump Administration would reverse course on Obama Administration positions assailing the independent contractor model. (See Holland & Knight's previous alert, "Will Trump Administration Curb the Recent Targeting of Independent Contractors?", Jan. 17, 2017). Shortly thereafter, the U.S. Department of Labor (DOL) withdrew two Obama-era guidance documents on joint employment and independent contractors, and the National Labor Relations Board (NLRB) overruled a decision issued during the Obama Administration that materially expanded the doctrine of joint employment under the National Labor Relations Act (NLRA). More recently, in the final days of the Trump Administration, the DOL finalized new regulations that provide a relaxed framework for employers to classify workers as independent contractors under the Fair Labor Standards Act (FLSA).

Now, as President-Elect Joe Biden's inauguration approaches, the looming question is will the pendulum swing the other way? This post revisits the issues of joint employment and use of independent contractors and potential impacts on businesses during the Biden Administration.

Expected Changes Under Biden

On the campaign trail, Biden pledged to "[a]ggressively pursue" employers who intentionally misclassify workers as independent contractors" by "enact[ing] legislation that makes worker misclassification a substantive violation of law under all federal labor, employment, and tax laws with additional penalties beyond those imposed for other violations." Consistent with this pledge, the Biden Administration is expected to take an aggressive, multi-pronged approach to addressing misclassification, including instructing federal agencies such as the DOL and National Labor Relations Board (NLRB) to increase regulation and enforcement, reversing the restrictive "joint employer" standard and seeking to establish a federal standard modeled on the "ABC" test for all labor, employment and tax laws.  

One of the first steps the new administration likely will take is to roll back the business-friendly rule announced by the DOL on Jan. 6, 2021, to determine whether workers are employees under the FLSA. The new rule focuses on the "economic realities" of the work arrangement and, in particular, whether the putative employer has actual control over the worker. The rule is scheduled to take effect on March 8, 2021, but it may be short-lived because Biden is expected to issue a memorandum freezing this rule before it takes effect. The Biden Administration will almost certainly return to the broader standard in place during the Obama Administration, allowing an employer-employee relationship to be established based on "indirect control" over the worker.

This relaxed standard likely will govern how the NLRB determines who is a "joint employer" as well, given that a Biden NLRB1 is expected to return to the joint employer test articulated in the Obama-era decision Browning-Ferris Industries of California, Inc., 362 NLRB 1599 (2015). Under Browning-Ferris, a business qualifies as a joint employer if it exhibits indirect control or the ability to exert control over employees, as opposed to direct and immediate control, which was the standard during the Trump Administration (and before Browning-Ferris). As only employees have the right to organize under the NLRA, a relaxed joint employer standard could encourage independent contractors of transportation and gig economy companies to seek to bargain with their direct employer and companies contracting with their direct employer. Such efforts likely would have the support of Biden's nominee for Secretary of Transportation, Pete Buttigieg, who pledged during his own presidential campaign to push for bargaining rights for independent contractors in the gig economy, and Biden's Secretary of Labor nominee Marty Walsh, a longtime union supporter who was head of the Building and Construction Trades Council before becoming the mayor of Boston.

During his campaign, Buttigieg also supported codifying on a national basis the "ABC" test, which examines whether the worker is (A) free from the control and direction of the hiring entity, (B) performs work that is outside the usual course of business of the hiring entity, and (C) is customarily engaged in an independently established trade, occupation or business. It is expected that the Biden Administration will push for a nationwide ABC test as well, and he may have the votes now that the Democrats picked up both U.S. Senate seats in Georgia's recent runoff election. Absent a federal rule adopting a nationwide independent contractor test, gig economy companies are expected to push for structures similar to California's Proposition 22 in other states, while the Biden Administration is likely to encourage states to adopt or continue to use the strict ABC test for determining independent contractor status. Notably, Proposition 22 adopted a hybrid model that offers minimum wage, benefits and retention protections to gig workers.

Key Cases in California

Meanwhile, two pending cases in the U.S. Court of Appeals for the Ninth Circuit promise to have a wide-reaching impact on motor carriers: first as to the classification of California truck drivers who haul freight, which remains a hotly contested issue at the regulatory agency level and in private class actions seeking to overrule independent contractor status of truck drivers, and second as to what state regulations may affect motor carrier operations.

The first case was filed in October 2018 in the U.S. District Court for the Southern District of California by the California Trucking Association (CTA) and two independent contractor owner-operators against the state of California and its agencies, the California Labor and Workforce Development Agency, the Department of Industrial Relations, the Labor Commissioner and the Employment Development Department. The CTA initially challenged the Dynamex decision, 4 Cal. 5th 903 (2018), in which the California Supreme Court established the strict "ABC" test to determine independent contractor status of truck drivers contracted to motor carriers instead of the long-standing established Borello test, which applies traditional common law factors to determine independent contractor status.

As Holland & Knight reported about the Dynamex decision when it was issued, while prong A of the test is reminiscent of the primary right-to-control test under Borello, the secondary Borello factors in Dynamex were replaced with the conditions set forth in the B and C prongs of the test. The B and C conditions make it significantly more difficult to classify workers as independent contractors. (See Holland & Knight's previous alert, "New California Law Codifies – and Expands – Strict ABC Test for Independent Contractor Status," Sept. 25, 2019.)

When the ABC test was codified by Assembly Bill 5 (AB 5) in the California Labor Code, effective Jan. 1, 2020, the CTA also challenged AB 5 in its lawsuit. On Jan. 16, 2020, the District Court granted CTA a preliminary injunction enjoining the enforcement of the ABC test set forth in AB 5, which was "as to any motor carrier operating in California, pending the entry of final judgment in this action." The effect of the District Court's action is to require that any determination of independent contractor status shall be governed by the traditional Borello common law standard.

California and its agencies, as well as the Teamsters union, filed appeals of the District Court's injunction in the Ninth Circuit. On Sept. 1, 2020, oral argument was heard by the court, and a decision is expected in 2021.

The second case pending in the Ninth Circuit (Case No. 18-73488) concerns a petition for review filed by the Teamsters seeking to overturn a final determination of the Federal Motor Carrier Safety Administration (FMCSA) that California's meal and rest break rules (MRB Rules) are preempted by federal regulation. The Ninth Circuit denied a request to stay the FMCSA's order, and oral argument was heard by the court on Nov. 16, 2020. That decision also is expected in 2021.

California's MRB Rules are codified in Labor Code Section 512 and reflected in Wage Order No. 9 governing the transportation industry. The application of these rules to motor carriers had a disruptive effect on their logistics operations and exposed motor carriers to costly legal proceedings, by way of regulatory action or private litigation, that sought recovery of meal and rest break wage premium pay and penalties due to the failure to comply with California's strict MRB Rules.

The FMCSA, which has authority to promulgate federal safety regulations and to review and preempt state laws that do not provide a safety benefit over the federal regulations, addressed the MRB Rules in response to a petition filed by the American Trucking Associations (ATA) and the Specialized Carriers and Rigging Association (SCRA). The FMCSA determined that California's MRB Rules were preempted by federal regulation as to truck drivers hauling freight in commercial motor vehicles operating in interstate commerce. After a thorough discussion of the impact of the MRB Rules on the safety of commercial motor vehicles, motor carrier operations and interstate commerce, the FMCSA determined that the "MRB Rules" were preempted by the FMCSA's Hours of Service (HOS) regulations, and that "California may no longer enforce the MRB Rules with respect to drivers of property-carrying CMVs subject to FMCSA's HOS rules." See California's Meal and Rest Break Rules for Commercial Motor Vehicle Drivers, Petition for Determination of Preemption, FMCSA Docket No. 2018-0304, 83 FR 67470 (Dec. 28, 2018).2

The effect of the FMCSA determination — and the rejection of the Teamsters' effort to stay implementation of the FMCSA's ban on the MRB Rules — is that motor carriers subject to the FMCSA order are shielded, at least for now, from claims for violations of California's meal and rest breaks. Should the order be overruled, anticipate ensuing litigation involving the retroactivity of such an order and whether the period of time in which the order was in place and not stayed should be excluded from any statute of limitations period. Furthermore, regardless of the Ninth Circuit's decision, this issue may well be revisited as a regulatory matter under the Biden Administration.

20 Posts in 20 Days Leading to Inauguration Day on Jan. 20

Holland & Knight's Transportation & Infrastructure Industry Sector Group is prepared to assist industry clients in adapting to the anticipated changes by the new administration. Our team is writing new blog posts each day leading up to President-Elect Joe Biden's inauguration, with insights as to likely impacts on the various segments of the industry, including Aviation, Construction, Maritime, Freight Rail, Motor Carriers, Transit and Autonomous Transportation. Bookmark our Election Impacts on Transportation & Infrastructure resource page to follow along.


Notes

1 The Biden Administration should be able to put its mark on the NLRB during the next several years, as President Biden will be able to nominate board members to fill the one current open vacancy and Board Member William J. Emanuel's expiring term on Aug. 27, 2021. The term of Board Member Lauren M. McFerran, appointed by former President Barack Obama, expires on Dec. 16, 2024, while the terms of two Republican-appointed members, Chairman John F. Ring and Board Member Marvin E. Kaplan, expire, respectively, on Dec. 16, 2022, and Aug. 27, 2025.

2 The FMCSA ruled, "(1) The MRB Rules are State laws or regulations 'on commercial motor vehicle safety,' to the extent they apply to drivers of property- carrying CMVs subject to the FMCSA's HOS rules; (2) the MRB Rules are additional to or more stringent than the FMCSA's HOS rules; (3) the MRB Rules have no safety benefit; (4) the MRB Rules are incompatible with the FMCSA's HOS rules; and (5) enforcement of the MRB Rules would cause an unreasonable burden on interstate commerce."

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