United States: Texas Federal Court Reinstates Trump Labor Department's Independent Contractor Rule

Highlights

• The U.S. Department of Labor issued a rule in January 2021 that sought to clarify who is, and who is not, an independent contractor for purposes of the Fair Labor Standards Act.
• The Biden Administration sought to undo the rule when it came into office, but the rule was recently reinstated.
• This Holland & Knight alert explains the rule regarding independent contractor status.

At the end of the Trump Administration in January 2021, the U.S. Department of Labor (DOL) issued a rule that sought to clarify who is, and who is not, an independent contractor for purposes of the Fair Labor Standards Act (FLSA).¹ The rule responded to decades of steadily diverging case law on the question across the federal circuit courts. It surveyed the legal landscape and emphasized two factors as particularly probative: the putative employer's nature and degree of control over the work, and the individual's opportunity for profit or loss. The rule was widely regarded as favoring independent contractor status and was to take effect on March 8, 2021.

Biden Administration Proposed Change

The Biden Administration sought to undo the rule when it came into office, but that can be more difficult than it seems. Typically, an administration cannot simply tear out an old rule from the books. It must instead perform an entirely new rulemaking, with a proposed rule to delay or remove the old rule, await and review public comment and then issue a final rule that removes the previous rule.

The Biden Administration took the following actions to remove the Trump Administration's independent contractor rule:

• On Feb. 5, 2021, it issued a proposed rule to delay the Trump rule's effective date.²
• On March 8, 2021, it issued a final rule delaying the Trump rule's effective date until May 7, 2021.³
• On March 12, 2021, it issued a proposed rule to withdraw the Trump rule.⁴
• On May 6, 2021 (one day before the delay would expire), it issued a final rule withdrawing the Trump rule.⁵

Recently, however, these actions were vacated, and the Trump Administration's rule was reinstated. On March 14, 2022, Judge Marcia Crone of the U.S. District Court of the Eastern District of Texas⁶ held that the Biden Administration's delay and withdrawal rules suffered from a variety of procedural legal defects. So the court vacated those rules.

What Does That Mean?

First, the court held that the Trump independent contractor rule "became effective as of March 8, 2021, the rule's original effective date, and remains in effect." So as of today, and so far as the judge's ruling extends, the Trump Administration's rule remains in effect for the purposes of determining independent contractor status.⁷

Second, employers should continue to watch the DOL closely for any indications as to how it interprets the ruling. Although the ruling purports to vacate the delay and withdrawal rules, there is a long-running legal debate as to whether such vacatur orders from lower courts do or ought to apply nationwide as opposed to only the court jurisdiction or to the plaintiffs involved. So it is possible that the DOL could file a motion for clarification with the court or offer a public statement that competes with what appears to be a nationwide vacatur of the rule.

Third, the DOL will almost certainly take new steps quickly to accomplish its goal of attempting to withdraw the Trump independent contractor rule. What is less clear is whether it will try to do so by appealing the Texas case, issuing a new proposed withdrawal rule or both. A common practice for agencies in this situation, including the DOL in the past, is to appeal the adverse ruling while simultaneously undertaking a new rulemaking during the pendency of that appeal. Sometimes the agency asks, and typically the court will agree, to stay the appeal while the new rule is proposed and finalized.

Fourth, the delay and withdrawal rules can be characterized as regulatory "defense" – repealing previous policies not in line with the new administration's. It is not known whether the current DOL has any regulatory "offense" in store for independent contractor status. But if it does, it may be more economical for the DOL at this point to combine both into one rule – a repeal-and-replace strategy, rather than repeal-and-replace-later.

Footnotes

1. See Independent Contractor Status Under the Fair Labor Standards Act, 86 Fed. Reg. 1168 (Jan. 7, 2021), codified in principal part at 29 C.F.R. §§ 795.100–.120.

2. See Independent Contractor Status Under the Fair Labor Standards Act: Delay of Effective Date, 86 Fed. Reg. 8,326 (Feb. 5, 2021).

3. See Independent Contractor Status Under the Fair Labor Standards Act (FLSA): Delay of Effective Date, 86 Fed. Reg. 12,535 (March 4, 2021).

4. See Independent Contractor Status Under the Fair Labor Standards Act; Withdrawal, 86 Fed. Reg. 14,027 (March 12, 2021).

5. See Independent Contractor Status Under the Fair Labor Standards Act (FLSA): Withdrawal, 86 Fed. Reg. 24,303 (May 6, 2021).

6. This is not Judge Crone's first U.S. Department of Labor (DOL) rule challenge. She also heard the challenge to the DOL's 2016 Fair Pay and Safe Workplaces Rule, also called the "blacklisting rule." Holland & Knight recently covered how the blacklisting rule may be making a comeback. (See alert, "USDA Proposes Contractor Blacklisting Rule for Its Contractors: One-Off or the First Domino?," March 18, 2022.)

7. See 29 C.F.R. § 795.100.

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